Northern Exposure

Canadian Employer Avoids Prior Severance Promises

by Karen Sargeant

During these tough economic times, employers are often looking to increase flexibility. Several of our recent blog entries have discussed ways in which employers can do so – furloughs, work-sharing programs, changing employment contracts, and adjusting the size of the workforce. Recently, the British Columbia Court of Appeal granted Raytheon Canada some flexibility when it said that Raytheon did not have to provide severance pay in accordance with prior promises. (Marija Ciric v Raytheon Canada Limited)

Severance pay promises
In January 2004, Raytheon began downsizing its Richmond, British Columbia, facility. Layoffs had been made, more were expected and were subsequently made, and Raytheon was anxious to retain key employees. In order to do so, Raytheon told employees that were not being laid off that the practice of paying severance pay based on one month’s salary for each year of service, with an upward adjustment for age and level, would continue to apply to employees who were laid off from the Richmond facility in the future.

Employees laid off between January and June 2004 received severance pay in accordance with the practice. They were given little or no working notice and paid in a lump sum upon signing a release.

Severance arrangements altered

In September 2005, Raytheon announced that the Richmond facility would close in September 2006 and that employees would receive working notice. Employees received termination letters, which made no mention of severance pay. An employee who later took the matter to court received notice on September 19, 2005, that her employment would be terminated on June 10, 2006. She felt that she should, in addition to working notice, receive the severance pay she had been promised in 2004. But she did nothing then. It was not until May 2006 that she raised the issue and sued Raytheon for the severance pay.

Trial judge finds for employee
The laid-off employee was successful at trial. The trial judge said that an agreement had been made for severance pay (as opposed to working notice) when Raytheon made the assurances in January 2004 and the employees continued working. By continuing to work, the employee accepted Raytheon’s offer. Once the agreement was made, Raytheon could not change it without the employee’s consent.

Court of appeal allows Raytheon to modify offer
Fortunately for Raytheon, the court of appeal saw things differently. It said that no agreement had been made for severance pay because there was no consideration. In order to have an agreement, there must be an offer, acceptance, and consideration (meaning each party to the agreement must give something up). The employee argued that her continued work was her consideration. The court of appeal disagreed. It said that the employee was already “bound to serve” Raytheon for her salary paid – so the continued work could not count as consideration as well:

Given the nature of the offer, there would have to be some additional consideration given by an employee, beyond the existing terms of the employment, to constitute acceptance by conduct. Such consideration may lie, not in the employee continuing to work for the company, but in continuing to do so until laid off. In that event, it would be the employee’s performance of the condition contained in the offer that would constitute the consideration the employee gives and amount to acceptance of the offer by conduct.

Unfortunately for the employee, the agreement could be formed only after she was laid off. Before that could happen, however, Raytheon withdrew the January 2004 offer when it gave her working notice. In that respect, the court of appeal said that the September 2005 notice of termination constituted a “clear withdrawal of any offer of severance that had been extended in January 2004.” Raytheon made it entirely clear to the employee that no severance was being offered to her. Instead, she was being given working notice.

Flexibility for employers
So how does this case provide flexibility to employers? If you are assessing the costs of firing or laying off employees, be sure to look at any prior promises you think were made. Did the employee provide additional consideration for the promise? If not, you may not have to live up to the promise. You may be able to withdraw it completely or vary it, as Raytheon did in this case. And if you are setting up retention or other similar programs, make sure that any conditions are clearly identified.

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