Notice periods, severance, stock options – employment law expert gives top tips on avoiding costly liabilities
In Canada, employee terminations can quickly become complicated—and costly—if they aren’t handled carefully. When letting an employee go, the financial risks can extend far beyond basic severance payments, particularly if long-service employees or stock options are involved.
Speaking to HRD, employment law expert and Roper Greyell founding partner Graeme McFarlane highlights why termination planning should be proactive, from structuring notice periods to tightening up contracts, to help HR leaders avoid unpleasant surprises.
McFarlane highlights that determining the right notice period can be challenging, as notice requirements vary based on factors like age, education, and the employee’s specific skills.
Canada also has stringent laws around notice periods based on length of service, and so a long-service employee could be entitled to as much as 24 months’ notice, and in rare cases even more.
“This means that technically, in Canada, you can’t really fire anybody at will,” McFarlane explains.
“The legal requirement is that you give working notice to an employee up to a maximum of 24 months. Employers will hardly ever do that of course; they’ll typically pay in lieu of that period of time. But this means an employer could be facing a hefty bill.”
To navigate this properly, McFarlane says that a well-structured employment contract is vital from the outset. Common Law notice periods can also depend on how easy it will be for an employee to replace their job, and so notice periods can look very different for the same position.
“Structuring the termination decision correctly is particularly relevant for smaller organizations,” McFarlane says.
“Managing the fiscal side of that can be difficult. But if you have a contract that contains a valid termination provision, then everyone knows what the end of the employment relationship will look like from the start.”
Despite this, McFarlane notes that a lot of organizations fail to plan for this, or fail to update their contracts as the law changes. He warns that tweaks to the law can and do happen, and if the courts don’t like your notice period provisions, they could go to great lengths to render those provisions void. In this case, you’ll revert to common law – and this will inevitably mean greater damages.
“Establish a proper set of employment contracts, and then monitor and adjust those contracts as needed,” McFarlane says.
“In the absence of a contract, being up to date on notice period trends, and knowing how to construct a termination script is a good thing to do. That way, you can avoid creating extra damages in the termination itself.”
Handling termination compensation for executives adds another layer of complexity, particularly around stock options. Without careful wording, companies can face costly litigation.
A recent Supreme Court case illustrates this point: the court sided with an executive who argued that their stock options should remain valid until the end of the notice period, not the termination date. “Unless you have specific language in your stock and employment agreement, you could face this situation,” McFarlane warns.
In this case, the executive was able to retain unvested stock options, creating a major financial obligation for the employer. McFarlane’s advice for HR leaders? Proactively review contracts for clarity on stock options and ensure they align with both company goals and legal expectations. Missing specific terms around stock options can result in financial liability far beyond what’s expected.
Ultimately, a proactive approach to termination not only safeguards the organization but also sets a clear, fair precedent for employees at every level. McFarlane emphasizes that the effort to establish thorough, up-to-date contracts and fair termination terms pays off by reducing risk and uncertainty.
“In the end, a solid termination plan isn’t just about legal compliance; it’s about protecting the company’s integrity and reputation,” he says. “Getting it right the first time can make all the difference when difficult decisions have to be made.”
For HR leaders, this means putting in the work up front to ensure that every contract—whether for entry-level roles or executive positions—reflects the latest legal standards and aligns with the company’s long-term goals.
