In recent months, we have seen a spike in group terminations. For HR professionals this often means a packed schedule of the worst-of-the-worst meetings. In our recent blog post, we discussed terminations with softer landings (and less chance of disputes and litigation), and bigger-picture best practices for those difficult exits. In this blog, we zero in on an aspect of severance package drafting.
In the process of structuring severance packages for (too many) employees, we’ve noted that some employers have forgotten about a handy clause that can lead to a win-win post-termination scenario for both employers and employees. However, the clause gets a bad rap because it is colloquially known as a “clawback clause” and can be misinterpreted as a sinister employer strategy.
While much more clunky than the “clawback clause”, it would help to re-name this underused clause something along the lines of the “if you get another job clause” or the “how to make the new job work for everyone clause”.
In some industries, the increase in remote and hybrid work arrangements has made it much easier for high-performing employees to re-employ in comparable roles. Those who land quickly often earn higher salaries, thereby increasing the benefit of this clause for both sides.
How the Clause Works
This clause incentivizes many employees to re-employ quickly and enjoy a period of income from both their old and new employers. The sooner they re-employ in a comparable role during their notice period, the longer the period of double income for the employee, and the more the prior employer saves on termination costs. It can be a win-win.
For example, consider an employee earning annual compensation of $150,000 who receives a 10-month severance package and starts a new job at month 6. With 4 months left of the severance package, the employee still receives 50% of the balance of the package (i.e. 2 months’ compensation of $25,000). This is paid while they’re also receiving income from the new employer. On the flip side, the terminating employer saves $25,000 in termination costs. If a handful of employees in a group termination land quickly in new roles and trigger this clause, this is a significant saving for employers that are often downsizing for financial reasons.
Where appropriate, offering outplacement counselling, a reference letter, job leads and anything else that may help the employee re-employ is good business practice, and also just nice of employers to do.
Sometimes this clause is negotiated such that it only kicks in once the employee re-employs in a role that pays at least a certain percentage of their prior compensation. This allows an employee to earn a nominal income without triggering the clause. It can be useful when employees are exploring a career change or just simply working to stay in the game until they land a comparable role.
Where it Works Best
The clause is more valuable the longer the notice period and the higher the employee’s income, so it is best suited for employees with significant common law entitlements on termination (e.g. older and/or longer-service employees and sometimes short-service employees). Keep in mind that regardless of when the clause may be triggered, employees must always receive their minimum entitlements to statutory termination pay and, if applicable, statutory severance pay (in Ontario).
If employees are entitled to common law notice, explain the intention and mechanics of the “if you get another job clause” clearly and positively in termination letters and/or termination meetings and perhaps there can be a silver lining for both sides at the end of that employment relationship.
Even Better…Use Enforceable Termination-Related Clauses
Having enforceable termination-related clauses in the employment agreement can eliminate the need for most severance package decision-making, including whether the “if you get another job clause” is appropriate.
With enforceable termination-related clauses, the severance package can simply mirror those clear and unequivocal terms in the employment agreement signed by the employee at the time of hiring, promotion, etc. Without this, employees are entitled to common law reasonable notice of termination, which can be significantly greater, and it is rarely a notice period that employers and employees agree on.
If you need help drafting an “if you get another job clause” or any other termination-related clauses, get in touch with our team.