Why you should dot your “i”s when negotiating a severance package

Kelly VanBuskirk, KC

Being “laid off”, “fired”, “dismissed”, or “de-hired” (yes, some HR professionals actually used to say that) is usually anxiety-inducing. Some employees choose to pursue a legal claim for compensation, and those claims either proceed to a trial or are settled by the parties beforehand. There are many good reasons for employees and employers to seriously consider settlement. In that regard, Donna Shestowsky’s research, published in Law and Human Behavior, suggests that litigants’ satisfaction and perceived fairness with settlement versus proceeding to adjudication in court is complicated by a number of factors, but settlement is often more satisfactory.

In employment law claims, there are usually a whole series of conflict points, and those provide added flexibility for settlement. Making a deal, though, attracts its own set of legal complications. In order to structure an agreement properly, particular details have to be covered off, and that’s an area where lawyers can help (or hurt).

A recent B.C. case, Brink v. Xos Services (Canada), Inc., illustrates the importance of how the parties communicate a settlement during their negotiations. When the employer offered an acceptable gross amount of compensation, the employee’s lawyer wrote back to say, “We have instructions to accept your client’s offer provided that the form of release is mutually acceptable (would you be able to provide us with a draft for review?) and payments are made in a tax effective manner….” Later, the parties could not agree on the tax treatment of the money, and the employee went to court for an order to enforce the settlement. The court ruled that the lack of detail regarding the employer’s release document did not prevent a finding that an agreement had been made, but the failure to specify the tax amounts to be withheld did. The court concluded that there was no valid settlement agreement because “…the tax treatment of the settlement payment was a condition of fundamental importance to both parties” and it had not been finalized.

The lessons to be reminded of are: a) settlements (rather than court hearings) are often advantageous to both parties; but b) when making a settlement, some details are more important than others. How the settlement funds will be taxed will usually be an important detail to cover off.