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How do severance packages work?

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  • Jul 20th, 2020 11:55 am
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[OP]
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Feb 4, 2010
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How do severance packages work?

For those with firsthand knowledge and experience (i.e. no guesses or opinions passed off as facts), what situation and context does it make more sense to negotiate for a lump sum vs salary continuance particularly for a tax perspective? I would also be interested in hearing from those of you who used an employment lawyer, how much more did you end up getting than the original offer? Is there an "ideal" package (e.g. 1 month for every year of service)? Edit: aside from the total amount offered and any clauses (e.g. clawback) what other things should be considered or asked during negotiations? Either way, hiring an employment lawyer is recommended, this is just for curiosity/general knowledge.

Based on preliminary research it seems like employers are hesitant/unwilling to offer lump sum. Here's what I've come up with so far:

Lump Sum
  • you get all the money upfront
  • company might go under or unstable
  • you have huge debts
  • you're financially savvy (have discipline)
The downside is that your benefits cease and you can't contribute to pension (if applicable), which may or may not be important.

Salary Continuance
  • maintain regular income
  • continue to receive benefits and pay into pension (if applicable)
  • should negotiate to get clawback removed
Last edited by hierophant on Jul 14th, 2020 3:15 pm, edited 1 time in total.
29 replies
Deal Addict
Jan 1, 2017
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You forget that if you get a lump sum you can turnaround and start another job without having to give up any of the severance. If you have continuance you are supposed to tell them if you get a new job before it expires and they will stop it immediately.

So if you think you can another job quickly go for the lump sum as you would be able to double dip.
[OP]
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Feb 4, 2010
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ProductGuy wrote: You forget that if you get a lump sum you can turnaround and start another job without having to give up any of the severance. If you have continuance you are supposed to tell them if you get a new job before it expires and they will stop it immediately.

So if you think you can another job quickly go for the lump sum as you would be able to double dip.
Couldn't one double dip with a salary continuance if there's no clawback cause? I suppose another situation where SC would be favourable is if the job market is slow or you don't plan to go back to work right away (e.g. training/school)
Member
Mar 16, 2007
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GTA
hierophant wrote: Couldn't one double dip with a salary continuance if there's no clawback cause? I suppose another situation where SC would be favourable is if the job market is slow or you don't plan to go back to work right away (e.g. training/school)
So I was just offered both lump sump and continuation options. For either option, there is no mitigation requirement, meaning that I am free to earn other income. So yes, you can double dip.
[OP]
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nioero wrote: So I was just offered both lump sump and continuation options. For either option, there is no mitigation requirement, meaning that I am free to earn other income. So yes, you can double dip.
If you don't mind sharing, which option did you end up choosing and why? Did you run it by an employment lawyer first? Were they able to do better?
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Mar 16, 2007
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hierophant wrote: If you don't mind sharing, which option did you end up choosing and why? Did you run it by an employment lawyer first? Were they able to do better?
I have not signed the package yet but most likely I will choose salary continuation. My personal financial situation is not bad so I don't need that lump sum right away. I don't think my former employer will go under in a year. Also no matter which option I choose, the benefit will continue until March next year.

I ran the original offer (31 weeks) by the lawyer and I was told that I should be getting anywhere between 10-15 months. After some negotiation by myself I was able to get 2 month more. It is not the best package and engaging a lawyer for a demand could possibly get me another 2 or 3 months. However, depending on how you want to pay the lawyer, the fee could be anywhere from a couple thousands to 30% of the overall recovery less deduction. So at the end, I might not be gaining much by going after the company.
[OP]
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nioero wrote: I have not signed the package yet but most likely I will choose salary continuation. My personal financial situation is not bad so I don't need that lump sum right away. I don't think my former employer will go under in a year. Also no matter which option I choose, the benefit will continue until March next year.

I ran the original offer (31 weeks) by the lawyer and I was told that I should be getting anywhere between 10-15 months. After some negotiation by myself I was able to get 2 month more. It is not the best package and engaging a lawyer for a demand could possibly get me another 2 or 3 months. However, depending on how you want to pay the lawyer, the fee could be anywhere from a couple thousands to 30% of the overall recovery less deduction. So at the end, I might not be gaining much by going after the company.
Wow so you get benefits with either option, that's great. So you've been there for 10+ year I take it? Why did you decide on SC? It seems like a lump sum would be a better option given your situation, no? Or from a tax perspective would it be worse especially if you get a job within the next couple of months so your annual income could be double, pushing you to the next tax bracket?
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Jan 31, 2006
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hierophant wrote: Wow so you get benefits with either option, that's great. So you've been there for 10+ year I take it? Why did you decide on SC? It seems like a lump sum would be a better option given your situation, no? Or from a tax perspective would it be worse especially if you get a job within the next couple of months so your annual income could be double, pushing you to the next tax bracket?
If that is the case, I will max out my RRSP contribution room and save the tax and will get refund too.
[OP]
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cgtlky wrote: If that is the case, I will max out my RRSP contribution room and save the tax and will get refund too.
So would you opt for lump sum? If you don't get benefits/pension continuance, would you go for SC or LS?
Deal Addict
Jul 16, 2019
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Min severance is 2 weeks a year. Any sensible company will pay 4 weeks a year as that is case law i.e. that is what the courts pay out as a minimum.
Other factors that weigh in :
Did you have another job and the current company poached you.
Your age, i..e older is tougher to get a new job.
Your skills i.e. specific skills only for a select industry.
Your title and role. Tougher for a older VP to find a equivalent job/pay compared to a retail associate at Gap.
Some companies will only offer lump sum while some will offer both. Some offer continuance with clawback if you join elsewhere which is shady and most employment lawyers will get it tossed.
There is no perfect answer to your question as it depends on your individual circumstances as you can see from the points I listed above.
I know one VP who got one year after working one year - he had to sue the company.
I know a Sales Director who got 8 months after 4.5yrs.
Employment lawyers can work on a contingency (25-30%) or on actual expenses. Obviously for actual expenses you are on the hook upfront and for contingency they will only get paid if you get paid. You need to figure out how close you are to what the expectation is which you can get by talking to a couple of lawyers for 20 mins. If the gap is at least 20-25% then use a lawyer.
Regarding lump sum, if you have coverage from a spouse I prefer this route as you have the flexibility to start somewhere else immediately. IMHO very few companies will offer a continuance without a clause not allowing you to work somewhere else. Unionized companies normally have to offer this and some of the better companies offer continuance for a few months to allow you to job hunt before taking the lump sum after 3 months.
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hierophant wrote: So would you opt for lump sum? If you don't get benefits/pension continuance, would you go for SC or LS?
I will opt for lump sum and moves on...

I understand some people would like SC due to their financial situation (can not control the money in hand, as clearly seem in the CERB thread, live paycheck to paycheck).
[OP]
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How is lump sum taxed? I'm assuming the employer gives the untaxed salary since they don't know what income bracket you're in?

Only reason why I would take SC is for the benefits and pension, provided there's no clawback clause.
cgtlky wrote: If that is the case, I will max out my RRSP contribution room and save the tax and will get refund too.
If someone was considering getting a HELOC (instead of mortgage renewal), would it make sense to put the money into a HELOC account that way you can pay off your house quicker with less interest?
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hierophant wrote: How is lump sum taxed? I'm assuming the employer gives the untaxed salary since they don't know what income bracket you're in?

Only reason why I would take SC is for the benefits and pension, provided there's no clawback clause.



If someone was considering getting a HELOC (instead of mortgage renewal), would it make sense to put the money into a HELOC account that way you can pay off your house quicker with less interest?
The last time, I took the lump sum payout, all the taxes are taken out already.
Deal Addict
Jul 16, 2019
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hierophant wrote: How is lump sum taxed? I'm assuming the employer gives the untaxed salary since they don't know what income bracket you're in?

Only reason why I would take SC is for the benefits and pension, provided there's no clawback clause.

Your employer already knows what you have been paid YTD and will tax your severance accordingly. Which is what they did for me.

If someone was considering getting a HELOC (instead of mortgage renewal), would it make sense to put the money into a HELOC account that way you can pay off your house quicker with less interest?
Jr. Member
Mar 5, 2004
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A friend's company recently had a large number of layoffs due to Covid. Many people with 20+ years experience capped out at 21 weeks working notice due to their letter of employment stating a cap of 21 weeks (2 weeks working notice per year to a maximum of 21 weeks).

Is it not industry standard to have a cap on severance / working notice in the offer for employment? Based on the above examples, it seems that many companies are much more generous then I am familiar with.
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Jan 1, 2017
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c3uo wrote: A friend's company recently had a large number of layoffs due to Covid. Many people with 20+ years experience capped out at 21 weeks working notice due to their letter of employment stating a cap of 21 weeks (2 weeks working notice per year to a maximum of 21 weeks).

Is it not industry standard to have a cap on severance / working notice in the offer for employment? Based on the above examples, it seems that many companies are much more generous then I am familiar with.
These caps are not enforceable, if the worker seeks their rights through a lawyer they would get a lot more. They are misleading to help the company to try to save money by lying to their employees that they can cap the payout. Tell your friend to seek Legal advice ASAP and not to sign any severance offer from the company without legal advice.
[OP]
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Is one month per year of service for any kind of dismissal or could it more if the employer is in the "wrong" (e.g. discrimination)?
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hierophant wrote: Is one month per year of service for any kind of dismissal or could it more if the employer is in the "wrong" (e.g. discrimination)?
How were you discriminated against and how do you prove that?
[OP]
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Feb 4, 2010
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ProductGuy wrote: How were you discriminated against and how do you prove that?
Why make assumptions instead of answering the question? Did you even see that I said e.g.

As for proving - the tone of your message almost suggests such thing doesn't happen, but at any rate each organization has its own process, if not you can file a complaint with the Ministry of Labour or Human Rights tribunal depending on situation.
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Apr 7, 2011
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I've only been offered a lump sum once, usually most larger firms do continuation. Because I need benefits coverage id oot for continuance.

I've negotiated payout of options, I was cut a month before they vested but they just dated them forward.

Because I've worked in an industry where it's routine to be laid off I would hesitate to get too aggressive a lawyer unless there was something shady or inappropriate. It's quite likely I'll end up working for one of the companies I left in the future and it's a really small world.

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