Navigating Severance Obligations in Canada: Key Insights for Employers

Key Takeaways

• Organizations can manage costs through clear employment contracts, structured payment plans, and outplacement services while maintaining strong employer branding
• 90% of Canadian organizations reviewed their severance policies in the last two years, with 38% calculating severance based on position rank and years of service
• Canadian severance obligations are governed by provincial legislation and common law, with most terminations requiring mandatory notice or pay in lieu of notice
• Common law entitlements often exceed statutory minimums, especially for senior roles, based on factors like age, length of service, and position seniority

If you’re a CEO, CFO, CHRO, or any member of the C-Suite, it’s critical to understand the costs and liabilities associated with severance and separation packages. Especially in today’s unpredictable business environment and potential for virality, the right approach to severance helps mitigate financial risks and protects your company’s reputation.

For leaders navigating restructuring, layoffs, or workforce realignments, recognize how severance affects your bottom line and your employer brand.

This article outlines the financial implications of severance packages and provides strategies for managing these costs while supporting a strong employer brand in the marketplace.

The data, unless noted, is from LHH’s Severance & Separation 2024 Benchmark Study, which gathered information from 500 organizations across the US and 200 across Canada. For more information regarding the methodology, download the full report.

What is the Definition of Severance Pay Costs?

When we refer to severance pay costs, it includes routine expenses, such as severance pay, termination pay, or what’s known as “pay in lieu of notice” stemming from the end of a worker’s employment.

“Pay in lieu of notice” is compensation provided by an employer to an employee when the employer terminates their employment without requiring them to work out the notice period. Ultimately, it serves as a form of compensation for the notice period that the employee would have typically worked.

There are also hidden costs to severance, which we’ll discuss later in the article.

How are Organizations Calculating Severance Pay?

According to LHH benchmark data across the US and Canada, the most common (38%) calculation is based on rank of position and number of years of service. Only 7% used a flat ‘number of weeks per year of service for all employees’ method.

How Often Do Organizations Review Their Severance Policies?

According to LHH’s study, 90% of total organizations surveyed in Canada reviewed their severance policies within the last two years, with only 5% having reviewed them within the last four years or over.

The Canadian Legal Framework for Termination: Varies by Province

Unlike the United States, where federal legislation typically governs termination practices, Canada does not have one unified federal standard. Instead, each of the provinces has different legislation—though they all require some amount of notice of termination (or, if notice isn’t given, an equivalent amount of pay in lieu of notice).

So, by law, all Canadian employees are entitled to termination pay or pay in lieu of notice under provincial legislation. This entitlement applies unless the termination is for “just cause,” which is reserved for severe misconduct such as fraud, embezzlement, or extreme harassment. The high threshold for ‘just cause’ ensures that most terminations fall under severance obligations.

This is the most significant difference between the US and Canadian severance policies.

Common Law and Severance Entitlements

When it comes to employee entitlements, the standards set by provincial legislation represent the bare minimum. C-suite executives typically receive much more generous compensation packages in comparison.

In Canada, termination obligations often go beyond statutory minimums due to common law, which is shaped by court decisions over time. Under common law principles, employees are entitled to reasonable notice—which can be determined by factors such as:

• Age: Older employees typically receive longer notice due to the difficulty of finding a comparable position.
• Length of Service: Longer tenure often increases severance entitlements.
• Seniority of Position: C-suite and senior roles typically merit enhanced packages.
• Recruitment Factors: Employees recruited from secure positions may be entitled to higher severance if terminated.

Since common law awards are unpredictable and often more costly, many employers attempt to contract out of common law entitlements. This involves drafting employment agreements that clearly define severance terms. When done correctly, these agreements provide certainty to the parties about the costs of termination and avoid costlier litigation. However, such termination agreements are difficult to draft and require extensive legal expertise.

Structuring Comprehensive Termination Packages to Reduce Potential Litigation

"Including clear severance provisions in employment contracts is one of the most effective ways to manage termination costs and reduce legal uncertainty. Without these provisions, organizations expose themselves to common law interpretations that can significantly increase their financial liability and litigation risk, said Kim Spurgeon, SVP, Head of Career Transition & Mobility, Canada, LHH.

Termination packages in Canada typically include:

1. Statutory Notice or Severance Pay: As mandated by provincial employment standards, a notice of termination or pay in lieu of notice must be provided.
2. Benefits Continuation: Employers must extend benefits (e.g., health care, vacation pay, severance pay, and any other benefits and pay arising from their employment) for the statutory notice period. Many extend benefits beyond this period as a goodwill gesture.
3. Additional Support: Senior executives often receive enhanced packages, including career coaching, counseling, or re-employment services.

To Ensure Compliance and Fairness, Employers should:

• Align packages with both statutory and common law obligations.
• Provide all benefits and entitlements employees would have received during the notice period.
• Budget for potential additional costs, particularly for long-serving or senior employees. This can also help mitigate unexpected costs over time.

Failing to meet Canadian severance standards can result in:

• Legal Challenges: Employees may file claims for wrongful dismissal, particularly if common law entitlements are overlooked.
• Reputational Harm: Poor termination practices can damage employer branding and affect recruitment efforts.
• Financial Penalties: Courts often award substantial damages in wrongful dismissal cases, far exceeding statutory obligations.

Proactive planning and legal consultation can help mitigate these risks while ensuring fairness and compliance.

Short vs. Long-Term Costs of Severance

While severance may feel like an immediate financial burden, it often helps companies avoid larger issues like wrongful termination lawsuits and low employee morale. A well-designed severance package is often an investment in future cost savings.

“In this competitive market for top talent with the right skills, Employees should feel a the same way about the organization on the day they were hired and on their last day of work,” said Kim Spurgeon, SVP, Head of Career Transition & Mobility, Canada, LHH. “It’s critical for an organization to have a fully planned ‘leaver’ experience that includes financial and job search assistance.”

Hidden Costs

Beyond the obvious expenses, severance may lead to hidden costs such as legal fees, higher unemployment insurance premiums, and drops in productivity if layoffs are mishandled. Failure to plan for these hidden expenses easily turns challenging situations into financial crises.

So, it’s vital to understand these financial implications to make informed decisions about the structure and generosity of severance packages. Inadequate plans for these costs could leave companies vulnerable to both short-term financial strain and long-term liabilities.

3 Biggest Liability Risks for CEOs and CFOs to Know

Severance packages come with potential legal and compliance risks leadership teams, including CEOs and CFOs, must be prepared to manage.

1. Compliance with employment laws

Canada does not follow one overarching law like the U.S. Worker Adjustment and Retraining Notification (WARN) Act, but it does have other employment legislation that mandates advance notice for large layoffs. Missteps in compliance can lead to substantial fines and penalties.

2. Discrimination claims

Severance packages must be applied fairly across the workforce to avoid potential claims of discrimination or unfair treatment. Inconsistent practices could trigger lawsuits that damage both finances and reputation.

3. Reputation management

Poorly handled severance processes can lead to negative press, erode employee trust, and hurt recruitment efforts. Ensuring a transparent and fair process helps mitigate these risks and preserve the company's reputation.

A proactive approach to managing severance liabilities can save a company from costly legal battles and reputational damage that are often more expensive overall than the severance payouts themselves.

3 Strategies to Manage Severance Costs Without Sacrificing Reputation

Balancing cost management while preserving a positive reputation is key for CEOs and CFOs handling severance packages.

1. Tailored severance policies

One size doesn’t fit all when it comes to severance. It’s important to design severance packages that reflect both your financial realities and your company’s values. Customizing the package based on employee tenure, level, and role can make the process fairer and more manageable.

2. Negotiation strategies

Offering severance in installments or structuring performance-based severance can help companies manage the cash flow implications of large payouts. This can reduce the strain on the company’s finances without compromising on fairness.

3. Outplacement and career transition services

By offering outplacement services, organizations support exiting employees in finding new jobs faster, which may shorten the duration of severance payments. This approach helps manage costs and enhances your brand’s reputation as a responsible employer.

When severance is managed strategically, it’s feasible for companies to reduce financial pressure while nurturing employee goodwill and brand loyalty.

More than ever, organizations understand the value of preparing workers for career transitions before separations occur. In 2024, 82% of surveyed employers in Canada say this is either ‘important’ or ‘somewhat important,’ while only 1% list it as ‘not important.’

In 58% of surveyed organizations across the US and Canada, HR leaders are selecting an outplacement partner (up from 35% of US organizations in 2020). The CEO is the decision maker in 35% of organizations, while only 5% of organizations delegate the decision to CFOs.

Best Practices for CFOs and CHROs to Forecast and Manage Severance Budgets

For CFOs and CHROs, forecasting severance costs requires precision and foresight. As you work with your teams, keep these best practices in mind.

Cost forecasting models

It’s essential to build a robust model forecasting potential severance costs based on different restructuring scenarios. By factoring in elements such as employee tenure and role, it's easier to predict the fiscal impact more accurately.

Data-driven decision making

Using severance benchmark data and historical trends helps ensure decisions are grounded. Having clear insights into the typical severance packages in your industry helps you stay competitive while avoiding overspending.

Restructuring and cost savings

Aligning severance packages with broader restructuring plans keeps layoffs or workforce changes from obstructing your company’s financial goals. By planning severance packages as part of overall restructuring, companies can soften the financial blow.

According to LHH’s Outplacement and Mobility 2024 Trends Report, 73% of surveyed organizations around the world are considering or initiating layoffs in the next year. So, we encourage proper forecasting and financial planning to ensure severance packages are both competitive and sustainable if layoffs are necessary.

Conclusion – Take the Time to Proactively Review Severance & Separation Policies – You'll Be Glad You Did

Managing severance costs and liabilities is a critical responsibility for C-suite teams, including CEOs and CFOs, especially in an era of uncertainty.

If you understand the financial implications of severance, proactively manage liabilities, and adopt strategic cost-saving measures, it’s easier to navigate the complexities of workforce restructuring while preserving both financial stability and corporate reputation.

Now is the time to review your severance policies and ensure they are aligned with both your company’s financial health and your commitment to a fair and responsible approach to employee transitions.

For more data on topics such as retention bonuses, severance variances by role, and more, be sure to get the newest benchmark report.

Download LHH’s Severance & Separation 2024 Benchmark Study

LHH surveyed 700 HR leaders who help their organizations manage talent. Our survey sample represented 500 organizations across the United States and 200 in Canada.

The organizations we consulted came from over 15 separate sectors and represented a range of sizes, from those with under 100 employees to those with over 25,000.

The topics covered in this study include severance, outplacement, redeployment, stay bonuses, and early retirement programs. For more methodology specifics, see the full report.

LHH provides comprehensive career transition and outplacement services, combining technology and industry experts for an impactful experience.