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When Salary Continuance Goes Wrong.

When an employee negotiates a severance package, it usually takes either one of two forms: Either the employee gets a lump sum payment and all ties with their former employer are cut or they end up on a time limited salary continuance. A salary continuance means the employee is put on the regular payroll with normal deductions and most of their previous benefits coverage and continued pension participation.

 Sometimes there is a provision that says that if the employee finds new employment while receiving the salary continuance they are obliged to tell the employer and then the employer will pay out 50% of the remaining continuance. An employer might say to a 24 year supervisor “We will provide your regular salary, most of your benefits and pension participation for the next 19 months or until you obtain new employment. If that happens you are obliged to advise us. We will then terminate your benefits and pension participation and pay you a lump sum equivalent to 50% of the salary left in the 19 month period.”

 That structure is meant to motivate employees to find new work as they still get 50% of what was remaining but the employer gets to save some money too. Keep in mind that in the absence of a settlement a judge would deduct 100% of everything the employee made from new employment during the notice period.

 Lump sum payouts are almost always for a lesser amount than the maximum potential salary continuance structure. Employees who think they will find work without too much difficulty prefer lump sum payouts. Employees who are not so sure prefer the salary continuance as it provides better insurance for their income. They may end up with less money at the end of the day if they find work early as they lose 50% of what is left but get more if they cannot find work.

 As Alice discovered, however, the larger potential salary continuance can leave the employee short changed. After 41 years of faithful service Alice negotiated a separation package which would see her receive a 16 months’ salary continuance with benefits coverage. Unfortunately, before Alice received all her money, the company she had worked for went bankrupt and the assets, not the corporation itself, were sold to a new company. That means that the shares in the corporation were not transferred. What was sold were liquid assets, receivables, equipment, inventories, work in progress, the office lease, contracts and intellectual property. Many of the employees from the old company carried on with the new. Alice was still owed almost $49,000 in separation payments and she became an unsecured creditor. As is usually the case, there was nothing left over for unsecured creditors and Alice was out of luck.

The majority shareholder in the old company that went bankrupt also declared personal bankruptcy. He and his spouse created a company where she became the sole director, officer and shareholder. That was the company that bought the assets. So, the husband and his company declare bankruptcy and the receiver sells the assets of the company to the wife. There is no suggestion that his spouse’ company paid anything less than fair market value. Alice was left out in the cold.

 When Alice sued the spouse’s company to try to collect her separation payments, she lost. I will not try to say that was fair but I will try to explain the law’s reasoning. Regardless of who owns the share in a corporation, if you work for a corporation, you work for the corporation, not that person. Whether it’s a small privately held company or a large publicly traded one makes no difference. The name of the employer on your T4 is the name of the company, not the name of the people who happen to own the shares in the company that day. Alice had never worked for the spouse’s new company and she had no relationship with it. The company that owed her money went bankrupt.

 Employees negotiating separation packages who are concerned about the economic viability of the company should push for a lump sum offer. That usually means they are going to get a lesser payout, but once the money is in the bank nobody can get it back.

 Unfortunately, that can’t always be negotiated. Suing for a lump sum payout will take you at least 24 months to result in a judgment. By that time, if the company was truly on thin ice, it will probably have disappeared anyway.

Ed Canning
Ed Canning
P: 905.572.5809
ecanning@rossmcbride.com