What is a Severance Pay Clawback

A severance pay clawback is a condition imposed by the employer on the fired employee’s receipt of the proposed severance pay, with the contractual arrangement enabling the employer to reduce the total amount of severance pay paid out should the fired employee find comparable replacement employment shortly after their termination.

The structure of the clawback typically involves severance pay being paid out in monthly installments, oftentimes over a six to twelve month period, with the indication that the fired employee is to seek comparable replacement employment, and should such employment be attained, oftentimes established where the new employment meets a threshold percentage of the departed employee’s prior salary, the remaining severance pay installments from that point forward would be reduced by a set percentage or eliminated in their entirety.

In addition to placing an obligation on the fired employee to seek comparable replacement employment in a timely manner, this contractual arrangement tends to place a positive obligation on the fired employee to promptly report their attainment of new employment and reduce their receipt of severance pay from that point forward.

As the following example illustrates, employers can have considerable incentive in having a severance pay clawback followed, whether it is to recover a portion of the originally offered severance pay or keeps their former employee away from their competition for the duration of the severance payments.

For example, where the termination letter sets out severance pay in an amount of $140,000, payable over 10 months at $14,000 at the end of each month. The clawback provision states that if the fired employee finds comparable replacement employment that pays at least 80% of their salary with their former employer, they would only receive 50% of the remaining installment payments. Now, if the fired employee starts a new job after 3 months, which pays at least 80% of their prior salary, they would have received 3 payments at $14,000 a piece, with the remaining 7 payments being only paid at $7,000 a piece, meaning that the resulting severance pay is only $91,000, such that the employer is achieving an effective saving of $49,000.

As this is a contractual arrangement, it is legally viable in relation to common law severance pay, provided that it doesn’t delay the payment of any statutory amounts, which have a very short timeline within which full payment must be rendered pursuant to the applicable employment standards legislation. That means statutory termination pay, vacation pay on termination, and statutory severance pay in Ontario, must be paid in very short order, with each employment jurisdiction having slightly different rules.

Although courts have permitted severance pay clawbacks when done correctly, their inclusion into a termination letter can also be the basis for a legal challenge by the fired employee, especially where there are other factors that are available to a fired employee to optimize their payout on termination. For when an employer is seeking to undercut payments to an employee, it can be indicative of efforts to reduce employee payments in other areas.

Our approach, however, is not for everyone. When we take on an employment case, we pursue it very aggressively, such that we don't pull our punches with your former employer. As such, for those individuals who simply want to move on, even if it means leaving behind a considerable amount of money, we are probably not the right legal team. For everyone else, especially those employed by larger companies (who think they are so strong and powerful to be beyond reproach), that meet our internal criteria for aggressive employment litigation, we have a unique legal approach that you should seriously consider. If this is of interest to yourself, feel free to contact our law firm in strict confidence, by telephone at 403-400-4092 or 905-616-8864, or via email at Chris@NeufeldLegal.com.