Saturday, 12 May 2012

Successor Co. Severance Policies

A frequent occurrence in what some once called “Silicon Valley North” is the overtaking of one company whose fortunes have changed (let’s say Nortel) by another.  For some employees the change is minor as they are fortunate enough to be hired on by these successor companies.  That is, however, until they are fired by these new companies.  As some employees of these new ‘grey knights’ are discovering not everything is necessarily the same as it was.

Some of these successor companies have attempted to insert “severance policies” into their employment agreements.  A frequently asked question I receive is whether or not these severance policies are enforceable.

Whether or not the severance policy is enforceable, which is to say whether or not the policy is actually determinative of the amount of severance to which a dismissed employee is entitled is a function of a number of factors well beyond the scope of a simple blog post.

In short, the answer is usually “no.”

The reason these policies are usually not enforceable is because the employee usually does not get anything for them beyond continued employment; and Ontario judges have pretty much consistently decided that continued employment is not simply good enough.


For those who wish to know more, here is my legal analysis:

The successor company (“Successor Co.”) is the party seeking to rely on the severance policy.  It therefore has the burden of demonstrating that the policy is a valid and enforceable contract.  As I tell my clients, not all agreements that people make are legally-enforceable contracts.  For example, if two parties agree that A will pay B to kill somebody and B has a change of heart, the court will not force B to do so.

In order for a contract to be valid three things must exist:  there must be an offer, the offer must be accepted, and both sides must get something (what lawyers call “consideration”) for that offer.

In the case of these successor companies, the company offered to hire the employee subject to the terms of its Severance Policy.  The employee ostensibly accepted that offer.  So far two of the three elements of a binding legal contract are in place.  However, query what the employee received for Successor Co.’s offer.  The only answer is employment.

The legal question for determination is therefore whether employment with a successor employer is sufficient consideration for a new restriction (the severance policy) to be placed upon the employee by Successor Co.

Ontario courts have generally observed that, “a modification of a pre-existing contract will not be enforced unless there is a further benefit to both parties”[1] and, more to the point, continued employment alone is no consideration.[2]  Better said yet still, the Ontario Court of Appeal observed in 2004 that:

The law does not permit employers to present employees with changed terms of employment, threaten to fire them if they do not agree to them, and then rely on the continued employment relationship as the consideration for the new terms.[3]

Nonetheless there are cases in which courts have determined that continued employment is sufficient consideration for a new restriction being placed on employees.[4]

The question thus turns on its facts, which is why the caveat about seeking legal advice specific to your situation is critical.

By and large, however, it has been my experience that it is very much worthwhile taking a critical look at the “severance policy” before simply agreeing to accept any offer made in accordance with it.

As always, everyone’s situation is different.  The above is not intended to be legal advice for any particular situation and it is always prudent to seek professional legal advice before taking any decisions on one’s own case.

Sean Bawden is an Ottawa, Ontario employment lawyer and wrongful dismissal lawyer. He tweets from @SeanBawden.

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