One Month Per Year – The Rule Of Thumb That Isn’t

In my legal practice I often advise clients in situations of dismissals without cause. A frequent issue is pay in lieu of notice (or severance). I may be advising an employer who is considering ending an employee’s employment but wants to provide reasonable pay in lieu of notice. On the other end of the spectrum, I may be advising an employee who has been wrongfully terminated without any pay in lieu of notice and is considering legal action. Another common scenario is an employee who has been terminated without cause, but who asks me to give my opinion on a severance package offered by the former employer.

In all of these situations, the client often remarks that he or she heard that an employee should get one month’s pay for every year of employment. It is commonly perceived there is a “rule of thumb” to this effect in employment law. I understand where the client may have received this perception. In some employment contracts, especially in those for larger organizations, there may be a written term that in a dismissal without cause the employee will receive one month’s pay for each year of service. As such, from word of mouth, the client may have heard from a friend, relative, etc. that this is what should be received in all terminations without cause.

While in a written contract the parties may agree and be bound to one month’s pay for each year of service, this is not a rule of law. Indeed, the Saskatchewan Court of Appeal expressly rejected this concept in its decision in Capital Pontiac Buick Cadillac GMC Ltd. v. Coppola, [2013] S.J. No. 454 (Sask. C.A.). In this case, the thirty four year old manager had been dismissed without just cause after not even two years of employment. The Trial Judge had awarded the employee six month’s pay in lieu of notice. The employer appealed.

The Court of Appeal dismissed the appeal and commented on the one month’s pay for one year of service “rule of thumb”. After noting that it has been rejected in most jurisdictions in Canada, the Court went on to say that such a “rule of thumb” runs contrary to the flexible analysis that the common law requires a Judge to undertake in a wrongful dismissal case. When faced with the question of what pay in lieu of notice is appropriate in a given case, a Judge examines and balances several factors. These include the employee’s age, the availability of alternate similar employment, the employee’s experience, training and qualifications and the employee’s length of service. To apply a “rule of thumb” of one month per year gives too much weight to the length of service factor over the others, even if length of service is used as a baseline from which the other factors add to or subtract from.

Part of the appeal of the “rule of thumb” is the concept that a long term employee has a moral claim to higher severance because it is harder for a long term employee to find new employment after dismissal. However, while not accepting the following proposition, the Court of Appeal noted that there may be information to suggest that short term employees may suffer economic loss after termination disproportionate to their short employment. Brief employment followed by dismissal without cause may be hard to explain to prospective employers, resulting in lengthy unemployment. The “rule of thumb” may run counter to short term employees’ actual experiences.

The “rule of thumb” also may appear attractive because it seems to provide certainty. It is an easy formula to follow. However, perhaps most interesting is that the Court of Appeal reviewed the wrongful dismissal jurisprudence and found that the “rule of thumb”, one month’s pay for one year of service, does not reflect what judges actually award in wrongful dismissal cases. The “rule of thumb” is an easy, but inaccurate, formula.

To follow the “rule of thumb” is to do so at one’s peril. It may lead to over or under compensation in a given case. While perhaps a more difficult process, it is best to exercise one’s judgment and analyze the factors of age, employability, skills and length of service to determine what is appropriate pay in lieu of notice in a particular employment termination situation.