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Media Centre :: Levitt's Corner ::

Avoid These Costs of Letting Go

Howard Levitt

While corporate Canada talks about cost savings, the following are some common practices employers could dispense with to save money:

Workplace investigations. This is the biggest boondoggle in employment law. In one case I know of, a hospital's lawyer recommended a friend from another firm to investigate whether a low-level employee was terminated with cause. The legal fees were several times what a judge, at most, could have awarded.

It is prudent to investigate before you fire an employee for cause and for any allegations of harassment and breaches of the human rights code. Quite apart from the legal necessity, it makes good business sense. But if there is not a lot of money or a potential workplace calamity involved, using outside counsel to conduct investigations is usually not worth the expense. If you do use outside counsel, a skilled employment lawyer can conduct most investigations and draft a report in a few hours.

In the hospital's case, it paid more than $70,000 for a report when the employee could have been fired for $30,000, and the $30,000 may still have had to been paid. Even a $15,000 investigation would not be financially prudent with only $30,000 at stake. And there is always a chance your investigator might uncover something not in your favour that you are obliged to disclose.

Excessive severance. When an employer prides itself on never being sued, I immediately presume it overpays severance. Certainly, toxic relations make employees more likely to sue. But so does having a reputation for being likely to capitulate. Having a reputation for being tough and vigorously contesting dismissal cases makes employees less likely to sue.

These days, most employees understand their rights and have a legion of lawyers, of varying competence, advising them. Even severances within the range of what a court might award are challenged. Most will ultimately accept less than a court might award because of the time and expense involved.

As long as your offer is not ridiculously low, most employees will accept a discount. While this approach might engender the odd lawsuit, that is far less expensive than awarding each terminated employee enough severance that they would never sue.

Clawbacks. The most common severance formula used in Canada pays the employee until they find other work and then provides them a lumpsum amount representing 50% of what would be paid to the end of the severance period.

This is far more than a court would ever award. In wrongful-dismissal judgments, employees are awarded for the time they are unemployed and, if they find employment, the difference between the old and new salary for the balance of the severance period awarded.

The 50% formula treats employees as if they took a job at half their former salary. But no one ever does. The vast majority of employees take new work at 90% or more of what they earned. For example, if a $240,000 salaried employee was awarded 12 months and found a job after four months at $220,000, a court would award $13,667 for the last eight months of the severence period. The 50% formula would award an additional $80,000. I recommend following the court's formula. If you want a simple percentage up front, offer 15%; and in an explosion of generosity, 25%.

Cause for discharge. Some employers never assert cause either because they mistakenly believe courts never make that finding or they can't be bothered.

This motivates poor performance from employees who want to leave with pay and squanders your severance dollars. If you have reasonable cause, assert it. Few employees will pursue a case where they run the risk of getting nothing while paying their lawyer and, ultimately, yours. With all of the vehicles for settlement - pretrial, mediation, judicial settlement conference, etc. - the employee will settle for far less than if you did not raise a defence.

Finally, if there is a risk of losing, the employee won't find a lawyer on a contingency basis. And without a contingency fee arrangement, many are reluctant to sue at all.