Fall is a season of new beginnings. Students go back to school and businesses recruit new talent to help them enact bold plans for the year. Because it is a time when exciting new employment relationships are established, the thought of those relationships one day ending is far from most employers’ minds. That is precisely why we encourage you to plan for the unforeseen end of those relationship before they even begin. That means including an employment “pre-nuptial agreement” or “pre-nup”—a contractual limitation on an employee’s post-employment entitlements in the event of termination without cause—in your employment agreements.
A properly drafted employment pre-nup will remove much of the uncertainty associated with an employee’s post-employment entitlements after his or her termination without cause. There are two powerful benefits to reducing the uncertainty associated with termination pay: cost containment and the management of employee expectations.
First, certainty in termination pay allows a business to accurately calculate and contain the costs associated with without cause terminations of the employment. In the absence of such an agreement, an employee terminated without cause is entitled to common law reasonable notice. Uncertainty is inherent in the calculation of common law reasonable notice, which is not calculated using a set formula, but is instead calculated with regard to factors such as the employee’s age, length of service and compensation, the character of his or her employment and the availability of alternate employment. These factors are given varying degrees of weight depending on the circumstances.
Importantly, the difference between common law reasonable notice and the termination pay in an employment agreement, which is often limited to the statutory minimums, can be substantial with one court stating that reasonable notice begins at three months. By agreeing on the sum of termination pay at the beginning of the employment relationship, an employer contains the cost of a future termination. A business is also able to calculate its overall termination pay liability with relative certainty. This information can be invaluable to business in both its financial and operational planning.
Second, by agreeing on termination pay up front, an employee will be aware of his or her entitlements from the very beginning of the employment relationship. This will substantially reduce the likelihood of adding insult to injury by terminating the employee without cause and subsequently offering a termination package that fails to meet the employee’s expectations. In addition, this strategy allows a business the flexibility to offer more termination pay than what is stated in the employment agreement and to show goodwill and generosity during what is undoubtedly a difficult time for the employee.
In the face of these advantages, why are employers so often reluctant to include pre-nup-style termination clauses in their employment agreements? For the same reasons as engaged couples awaiting their nuptials—the pessimistic contemplation of the end of a relationship before it is even started, which can be indicative of a lack of commitment. Some employers even fear that prospective employees—particularly in industries where top talent is in high demand—will decline their offers if an agreement to enter into a pre-nup is an employment pre-requisite.
Leaving aside the relative merits of true pre-nuptial agreements, in the context of an employment relationship such agreements are all but essential. A business must be financially viable to survive, which involves financial planning, budgeting and the mitigation of risk. The inclusion of termination provisions in employment agreements allow businesses to contain and accurately calculate their potential termination pay liabilities with accuracy, while also providing some certainty to an employee during a time rife with unsettling emotions. Employment pre-nups may also help prevent an acrimonious parting of ways, litigation and protect your business’ financial stability. It may be awkward, but insisting on an employment pre-nup simply makes sense for your bottom line.
This blog is provided as information and a summary of workplace legal issues.
This information is not intended as legal advice.