Severance In A Recession 

A recession may be coming in Canada, according to Bay Street economists. If there is a recession, there will be a rise in job losses. 

A question for employment lawyers is, does a recession affect severance pay? More specifically, does a recession change how much severance someone is owed? Is an individual entitled to more, less or the same severance during a recession?

An employee might assume that during a recession, it could take them longer to find new employment and therefore they should be awarded more severance. 

At the same time, employers may assume that during a recession, with the financial pressures that come along with it, they may be able to award dismissed employees less severance than normal on account of society’s greater need to keep employers like themselves afloat. 

In the above examples, the employee’s assumptions may be correct while the employers will be wrong. An employee may be awarded slightly more severance during a recession while an employer’s severance duty will certainly be unchanged. 

Under the common law, severance (i.e. notice or termination pay) is awarded equivalent to “pay in lieu” of the period it would take an employee to find comparable employment, having regard to the (1) age of the employee; (2) their length of service; (3) their character of employment; and, importantly, (4) the availability of similar employment.

When considering “the availability of similar employment”, what effect does a recession have in calculating severance? The answer, analogously, was provided in the case of Lim v. Delrina (Canada) Corp. (1995), 1995 CanLII 7271 (ON SC), where the court held:

“The lack of available employment opportunities due to depressed economic conditions in a particular industry… can be considered so as to increase notice but not to decrease it.”

That court in turn increased the employee’s notice period by one-third to take into account the depressed economic conditions. 

More recently was it confirmed that while severance can be increased because of economic situations, it cannot be decreased. In Michela v. St. Thomas of Villanova Catholic School, 2015 ONCA 801 (CanLII), the Ontario Court of Appeal answered whether an employer’s financial circumstances are a relevant consideration in determining severance. 

The court found that “character of employment”, like all the above-noted severance calculation factors, is concerned with the circumstances of the employee, not with the circumstances of the employer:

“An employer’s financial circumstances may well be the reason for terminating a contract of employment – the event that gives rise to the employee’s right to reasonable notice. But an employer’s financial circumstances are not relevant to the determination of [severance] in a particular case: they justify neither a reduction in the notice period in bad times nor an increase when times are good.” 

Thus, suffice to say that while an employee experiencing a challenging job search because of a recession may be entitled to more severance, an employer experiencing a challenging market because of a recession is not allowed to decrease the amount of severance owed to terminated employees. 

Read More: 10 Facts About Severance 🔟

A recent example of an employee who was awarded additional severance because of a recession was the Ontario Superior Court case of Hampton Securities Limited v. Dean, 2018 ONSC 101 (CanLII). There, the employee worked for one year as a trader, and her employment was terminated “in the depth of an economic recession”. The court went on to state:

“Depressed economic conditions at the time of termination which make a new position more difficult to find, are a relevant factor to consider when determining the length of notice.”

As a result, the court awarded the employee four months’ severance, finding that although the “ordinary notice period for someone in [her] position would be three to four months. I would tend towards the higher end of that scale given the depressed circumstances in the securities industry at the time of termination”. 

Conclusion: More Severance In A Recession

In summary, employees terminated during a recession in Canada could expect to receive a slight “recession bump” in their severance (about one month generally). At the same time, naturally, employers cannot expect a slight “recession discount” on their severance awards. Employees should beware however that a judge does not always have to give a so-called recession severance bump in bad times. Indeed, during covid, judges were split on whether to award a covid severance bump considering similarly poor economic and job search issues at one time.