Howard Levitt: Courts lift cap on severance, creating a looming litigation free-for-all

Two recent court decisions create uncertainty on severance in another blow to employers

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By Howard Levitt and Stephen Gillman

Leading up to the pandemic and continuing to present day, Canadian courts have delivered one blow after another to employers, including the near eradication of an employer’s ability to limit severance liability by way of enforceable contractual terms.

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Consistent with this, and much to the dismay of employers, our courts have elected to take it one step further, signalling that the traditional high watermark of 24-months’ severance ought to be treated as a discretionary guideline rather than an ostensible cap on an employer’s liability.

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Under the existing framework, the law was simple: a court would assess the ability of the dismissed employee to find another job based upon a number of factors and arrive at a reasonable notice period on that basis. While not a precise exercise, an employer could generally assess their worst-case exposure would not exceed two years, subject to a determination that “exceptional circumstances” must exist to justify any award in excess of that.

For a court to conclude that “exceptional circumstances” were present, and that an employee’s entitlements ought to be assessed outside the status quo framework, something truly exceptional was required. The best example would be an employee who requires additional training, education or designation in order to secure a comparable position in today’s employment market as a result of increased standards since the point at which they were hired for their previous role.

Until recently, the law was somewhat settled by way of the 2019 decision in Dawe vs. The Equitable Life Insurance Company of Canada. In that case, a vice-president who was dismissed on the eve of his eventual retirement after four decades of service was awarded 30-months’ notice. To the surprise of no one, the employer appealed the decision, asserting that the lower court’s award was excessive.

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The Court of Appeal overturned the 30-month notice period, concluding that exceptional circumstances were not present and that the lower court’s consideration of the employee’s upcoming retirement plans were irrelevant.

Although Dawe was unable to wholly negate the damage done by our courts’ magnified scrutiny of termination clauses more generally, employers were relieved that it reintroduced some semblance of predictability to the often opaque calculation of common-law severance.

Unfortunately, renewed unpredictability has arrived by way of two recent Court of Appeal decisions. Apparently, the extraordinary has become ordinary. In Milwid vs. IBM Canada Ltd., a manager in his early 60s with 38 years of service was awarded 27-months’ severance. Meanwhile, in Lynch vs. Avaya Canada Corp., a skilled non-managerial employee of similar age and service was awarded 30-months’ severance.

To our eyes, there was nothing exceptional about either circumstance. After all, up until now it has been understood that mere age and service are insufficient to meet the threshold to justify deviating from the status quo.

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Both employers appealed. However, unlike in Dawe, the Court of Appeal elected not to overturn either decision and inexplicably failed to provide a reasonable basis for letting both decisions stand, leaving employers increasingly exposed to what can only be described as notice period inflation.

For example, in the Lynch decision, the Court of Appeal leaned heavily on the employee being a “key performer” as a factor evidencing “exceptional circumstances.” By that logic, all that would be needed to breach the 24-month cap would be a positive performance review prior to dismissal. Such a determination runs contrary to the established principle that notice periods ought to be determined objectively rather than on some sort of faux merit-based scale.

If our courts want to start considering employee performance as a factor, then shouldn’t a lousy employee be deserving of more severance? After all, it should presumably take them longer to secure new employment. Of course not.

So why are we straying from objective assessments on the other side of the coin? It is nothing short of absurdity.

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In our opinion, the decisions in Milwid and Lynch represent a significant step that will have the impact of making it increasingly difficult to forecast a realistic range of outcomes. This isn’t good for anyone, as it will lead to lottery ticket litigation, lengthy, expensive and an inefficient use of party and court resources.

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Now more than ever, employees and employers alike benefit from predictable outcomes. Despite this, our courts appear bent on providing precisely the opposite in this field. Something needs to change, sooner rather than later, as the current trajectory will create more problems than it will solve.

Howard Levitt is senior partner of Levitt Sheikh, employment and labour lawyers with offices in Toronto and Hamilton. He practices employment law in eight provinces and is the author of six books including the Law of Dismissal in Canada. Stephen Gillman is a partner at Levitt Sheikh.

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