Canada: Severance Strategies In A Slumping Economy

Last Updated: March 14 2016
Article by Daniel R. Bokenfohr

The drop in oil prices has proven to be more dramatic and prolonged than many experts expected. Hope for a quick recovery is now extinguished, as the impact of low energy prices continues to spread across many sectors of the Alberta and Canadian economy. This has economists warning that Alberta is likely in the midst of its longest and deepest economic slump since the early 1980s.

As a result, 2016 is expected to be the worst job market Albertans have seen in decades. In January, Alberta's seasonally adjusted unemployment rate was 7.4%, the highest it has been since 1996, and the first time it has been above the national rate since 1988. Experts predict a further contraction of the Alberta economy through the first half of 2016, leading to more layoffs and further increases in the unemployment rate.

This economic climate is challenging not only for individuals forced to enter a stagnant job market, but also for employers attempting to reduce costs.

A poor economy can increase the severance liability of employers in two ways:

  1. it may increase the amount of severance pay discharged employees are entitled to claim based upon the principle of reasonable notice, and
  2. it will decrease the likelihood the employees will mitigate their damages by finding employment prior to the end of their notice periods.

Reasonable Notice

In the absence of just cause for dismissal or a written employment agreement spelling out an employer's severance obligations, employees are entitled to "reasonable notice" of termination, or pay in lieu of such notice. What constitutes reasonable notice depends upon a number of factors relating to the circumstances of the individual employee, the nature of his/her job and the availability of similar employment. This final consideration is an important factor given that the ultimate purpose of requiring notice of termination is to give the dismissed employee a reasonable opportunity to find other employment. As recently clarified by the Ontario Court of Appeal in Michela v. St. Thomas of Villanova Catholic School, an employer's financial struggles will not justify a reduction in the notice period. In fact, an economic downturn can lead to a lengthening of the notice period if the job market becomes depressed. However, courts have cautioned that this factor should not be given undue emphasis because, in fairness to employers, some limit needs to be placed on the period of notice to be given to discharged employees even if there is no work available due to poor economic conditions.


Upon being wrongfully dismissed (i.e. without receiving reasonable working notice or pay in lieu thereof), employees generally have a duty to mitigate their losses by searching for comparable, alternative employment. This duty requires individuals to take reasonable steps to replace their lost employment income. If successful in finding work, any income earned for work during the notice period will be deducted from the damages the dismissed employee could otherwise claim.

The employer has the onus of establishing any failure on the part of the dismissed employee to act reasonably in mitigating his or her losses. If a failure to reasonably attempt to mitigate is established, the employer will not be held liable for those losses the employee could reasonably have avoided.

In the past in Alberta, employers could expect most employees to find new employment shortly after their termination. That has now changed. Employers face the real prospect of laid off employees remaining out of work, through no fault of their own, for the entirety of their notice period.

Risk Management Strategies

As a result, it is important for employers to implement staff reduction strategies which protect against the risk of heightened severance liability in poor economic times.

The most effective strategy is to proactively address your severance obligations in a written employment contract or offer of employment. However, if attempting to implement new contractual terms during the course of employment, extra care is required in order to create a binding agreement. In these circumstances, the employer has the onus of establishing that the severance provisions were clearly communicated to the employee, the employee appreciated that he or she was giving up legal rights and the employer provided fresh legal "consideration" to the employee in exchange for giving up those rights. Moreover, employers have an obligation to perform the contract of employment in good faith, which requires honesty in the negotiation of new severance terms. This obligation of good faith will be scrutinized particularly closely at the time of dismissal, and bad faith in the manner of dismissal can lead to the award of aggravated or punitive damages against an employer. It would therefore be extremely difficult and risky for an employer to propose new severance provisions to an employee in advance of a premeditated layoff.

For employers implementing terminations without any contractual certainty as to the amount of severance or notice required, it is wise to make attempts at the outset to propose a severance package that minimizes the risk of wrongful dismissal litigation.

Severance packages can come in many forms, including working notice, lump sum payments and salary continuance. While employers often have good reason to be reluctant to provide working notice, it should not be forgotten that is an available option. After all, the core obligation owed to an employee is reasonable notice of termination. If an employee is entitled to 6 months' notice of termination, for example, the employer's obligations could be fully satisfied by putting the employee on clear notice that his/her employment will terminate in 6 months' time. The primary benefit of an employer giving working notice in whole or in part is that it receives something back from the employee in exchange for the compensation paid during the notice period.

Where pay in lieu of notice is offered, this allows the employer the opportunity to secure a full and final release from the employee in exchange for the severance package. The challenge for employers, particularly in poor economic times, is formulating a fiscally responsible severance package that the employee is likely to perceive as fair and reasonable in the circumstances.

The attractiveness of a lump sum payment to a dismissed employee is that the payment is not subject to mitigation. In good economic times, employees often take a calculated risk that they will find new work well in advance of the expiry of their reasonable notice period. This allows them to accept a discounted lump sum payment with the expectation that they may achieve a net gain in employment income during the notice period by finding new employment relatively soon. This sort of win-win severance solution is much more difficult to achieve in a poor job market.

In such a climate, salary continuance can become a more attractive option, because it can be structured to provide the assurance of employment income for the duration of the reasonable notice period, as well a possible discount for future mitigation. These arrangements are typically structured so that the salary continuance payments end early if the employee finds new employment. In order to encourage the dismissed employee to find new employment as soon as possible, these severance packages often also include a lump sum amount (for example, half of all remaining salary continuance payments) that becomes payable if the employee finds a new job early.

Providing access to outplacement services at the time of termination can also be a helpful tool in executing a severance strategy. The inclusion of these services increases the likelihood of mitigation through new employment which would ultimately be best for everyone.

Staff reductions are always difficult, but if approached with these strategies in mind, employers are more likely to successfully minimize their severance liabilities and avoid costly litigation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Daniel R. Bokenfohr
Events from this Firm
19 Dec 2017, Webinar, Calgary, Canada

McLennan Ross previously conducted a webinar on June 6, 2017 about the passage of Bill 17, during which we reviewed the changes to the Employment Standards Code and the Labour Relations Code. During that webinar, we identified a number of issues which would depend upon the language of the Regulations, which had not yet been developed.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions