3.9 Repayment of Severance and Redundancy Pay. Introduction

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1 Introduction Figure 1 Government has undertaken a number of initiatives in recent years to decrease the size of the public service. As part of Government s effort to assist employees displaced as a result of these initiatives, in December 1990 Government revised its Re-employment Priority Policy which addresses many aspects of the needs of displaced workers. For example, Government provides counselling services, alternate employment services, relocation benefits, redundancy pay, and severance pay. During , and , Government and its Crown agencies paid a total of $67.5 million in ex-gratia and other payments. A significant portion of the $67.5 million was redundancy and severance paid to displaced employees of Government departments, school boards, health care boards and other Crown agencies. Figure 1 provides a summary of ex-gratia and other payments made over the past three fiscal years. Ex-gratia and Other Payments Years ended 31 March $ Millions Entity Total Government Departments $21.8 $17.6 $2.3 $41.7 Pooled Pension Fund Health Care Boards School Boards Community Colleges Newfoundland Farm Products Corporation Total $30.5 $27.9 $9.1 $67.5 Source: Government s Financial Statements and Accounting Records Auditor General of Newfoundland 103

2 Conclusions Section 17 of the Financial Administration Act indicates that the Minister of Finance may, subject to the approval of the Lieutenant-Governor in Council and another Act, negotiate and accept a settlement of a debt. Treasury Board Secretariat did not have the approval of the Lieutenant- Governor in Council as required by the Financial Administration Act when it issued its Directive stating that employees who are required to repay redundancy and/or severance benefits have the option of making lump sum repayments or negotiating a repayment schedule acceptable to their department based on their ability to pay and the salary earned in their new position. As a result, Government is in contravention of the Financial Administration Act. Government s policy is unclear as to who is responsible for ensuring amounts owing for severance and redundancy pay are actually collected by Government. Furthermore, Government has not carried out any reviews to ensure employees who received severance and/or redundancy payments, and who were subsequently rehired by Government departments, Crown corporations, and other Government agencies, repay amounts owing in accordance with Government policy. Although Minute of Council indicates that compensation practices of Government are applicable to Crown corporations and other Government agencies, Government s current policy is silent on the issue of rehiring in these entities. Government s current policy does not address the repaying of severance and redundancy pay if an employee of one Government entity obtains employment with another Government entity. Of 24 employees selected for review to determine compliance with the Financial Administration Act and Government s Re-employment Priority Policy, we found the following instances of non-compliance: 6 employees were provided with the option of repaying their severance pay and/or redundancy pay over a period of time. Five of these 6 employees accepted this repayment option. These repayment options contravened the Financial Administration Act. 4 of these 6 employees had their repayment calculations, in part, based on their new lower salaries. The departments, therefore, reduced the amounts the employees were required to repay. In our opinion, under Section 17 of the Financial Administration Act, there is no authority for Departments to reduce amounts owing by rehired employees and therefore the reductions contravene the Act. 104 Auditor General of Newfoundland

3 However, we do note that although in all 4 cases the departments are reducing the amounts owed by the employees based on the employees new lower salaries, the departments used the employees gross amount received and not the net as is allowed in accordance with the General Service Collective Agreement signed 21 April This resulted in 3 of the 4 employees actually paying more than they would have if the provision in the Collective Agreement was followed. However in the fourth case, because of errors in the calculation of the amounts due, the employee has paid less than the amount required to be repaid. 3 rehired employees did not repay their severance pay and/or redundancy pay in accordance with Government policy and Government did not pursue collection of amounts due. We also found an instance where an employee s repayment amount was based on the individual s new higher salary and resulted in the employee paying back more redundancy pay than was originally received. Although an employee commenced an employment contract with one department a week before their employment was terminated at another department, the individual was provided with severance pay and redundancy pay totalling $53,037. I am concerned that Government would enter into an arrangement which provided severance pay and redundancy pay totalling $53,037 to an employee while ensuring that the employee retained a position within Government with exactly the same salary and benefits. In addition, as a result of the overlap in the contract commencement date and the employee s redundancy date, the employee was paid $1,298 for six days as a salaried employee and $1,298 for the same six days under their employment contract. The employee did not repay any of the $53,037 relating to severance pay and redundancy pay or any of the duplicate salary payment of $1,298. In 1998, a former employee of a health care corporation terminated employment and received a payment of $30,000. This did not represent severance as the employee accepted employment with another public service entity and, in accordance with Government policy, carried the years of service forward to that entity. There was no authority for the corporation to pay this $30,000. Auditor General of Newfoundland 105

4 Findings and Recommendations 1. Review of policy As outlined in Government s Personnel Administration Procedures Manual, employees who voluntarily terminate or involuntarily terminate (through redundancy) their employment are eligible for severance pay at the rate of one week of pay for each year of past employment with Government provided the employee has a minimum of nine years of continuous service. The maximum payable for severance pay is twenty weeks salary. In addition to severance pay, employees whose employment is terminated by Government, are eligible for redundancy pay which is effectively pay in lieu of notice. The amount paid to an employee depends upon their age and length of service. Government s Personnel Administration Procedures includes a grid which outlines the number of weeks of pay to which employees are entitled based on their age and length of service. If an employee has received severance and/or redundancy pay and is subsequently rehired, Government s Personnel Administration Procedures policy states that the employee shall be required to pay back part of any severance pay and/or redundancy pay they received. The amount that the employee has to repay is based on the length of time the employee has been out of the public service. Figure 2 Figure 2 outlines Treasury Board s interpretation of the repayment provisions of the re-employment and priority policy contained in Government s Personnel Administration Procedures. Policy on Repayment of Severance and Redundancy Pay Re-employment Severance Redundancy 1. re-employed into a permanent position during the redundancy notice period 2. re-employed into a temporary or seasonal position during the redundancy notice period 3. re-emp loyed in permanent, temporary or seasonal position after redundancy period Source: Treasury Board Directive, 8 April 1997 Repay All Not required to repay Not required to repay Repay portion which overlaps with period of re-employment. Repay the portion which overlaps with period of temporary or seasonal re-employment. Not required to repay. 106 Auditor General of Newfoundland

5 Treasury Board s interpretation of the repayment provisions of the reemployment and priority policy contained in Government s Personnel Administration Procedures Manual provides guidance on redundancy pay and severance pay including the repayment of these benefits. Specifically, employees who are required to repay redundancy and/or severance benefits have the option of making lump sum repayments or negotiating a repayment schedule acceptable to their department based on their ability to pay and the salary earned in their new position. In addition, Article of the General Service Collective Agreement signed 21 April 1998 provides that the amount of severance and/or redundancy pay to be repaid shall be based on the net (our emphasis) amount received by the employee and/or the amount paid to a financial institution on behalf of the employee. Our review of Government s policy with respect to the recovery of severance and/or redundancy entitlements from employees who were rehired by Government after termination of employment indicated the following: A Treasury Board Directive dated 8 April 1997, states that employees who are required to repay redundancy and/or severance entitlements have the option of making lump sum repayments, or negotiating a repayment schedule acceptable to management based on their ability to pay and the salary earned in their current position. However, Section 17 of the Financial Administration Act indicates that the Minister of Finance may, subject to the approval of the Lieutenant-Governor in Council and another Act, negotiate and accept a settlement of a debt. Treasury Board Secretariat did not have the approval of the Lieutenant-Governor in Council as required by the Financial Administration Act relating to the policy of permitting individuals to negotiate a repayment schedule and therefore, is in contravention of the Act. Government s policy is unclear as to who is responsible for ensuring amounts owing for severance and/or redundancy pay are actually collected by Government. While some Government officials indicated that the responsibility of identifying amounts that have to be repaid rests with the hiring department, Crown corporation or other government agency, other officials indicated that they did not know. Auditor General of Newfoundland 107

6 Minute of Council indicates that compensation practices of Government are applicable to Crown corporations and other Government agencies. As a result, employees who received severance and/or redundancy pay upon termination of employment with Crown corporations and other Government agencies are required to repay the amounts in accordance with Government policy. Government does not know the extent to which Crown corporations and other Crown agencies are complying with the policy. There is no review by Government to ensure compliance with its repayment of severance and redundancy pay policy by departments, Crown corporations, and other Government agencies. Article of the General Service Collective Agreement is not equitable. For example, two individuals having identical positions and identical length of service with Government will experience different financial results depending on whether they roll their severance and/or redundancy pay into an RRSP or opt to receive payment. The individual choosing to roll their severance and/or redundancy pay into an RRSP will be required to repay the gross amount. The individual opting to receive payment, however, would only be required to repay the net amount under Article of the Collective Agreement. 2. Review of compliance with policy To determine whether Government was complying with its policy regarding the recovery of severance and/or redundancy pay, we selected a sample of former employees of Government departments who were subsequently re-hired. To select the sample, we compared Government s listing of former employees who received severance pay and/or redundancy pay during 1996, 1997 and 1998 to Government s 31 March 1999 payroll to identify former employees who were subsequently re-employed. Of the 1,142 former employees on Government s listing who received severance and/or redundancy pay, 113 employees were on the payroll as at 31 March We reviewed 11 of these 113 employees to determine whether they should have repaid their severance and/or redundancy pay, and whether in fact repayments had actually been made. In addition, we selected 13 other employees identified during other audits to determine whether any severance and/or redundancy pay received should have been repaid. 108 Auditor General of Newfoundland

7 Of the 24 employees selected for review, we found instances of noncompliance with the Financial Administration Act and Government s Reemployment Priority Policy relating to 9 employees as follows: (a) Non-compliance with the Financial Administration Act Section 17 of the Financial Administration Act indicates that the Minister of Finance may, subject to the approval of the Lieutenant- Governor in Council and another Act, negotiate and accept a settlement of a debt. Treasury Board Secretariat did not have the approval of the Lieutenant-Governor in Council as required by the Financial Administration Act to permit individuals to negotiate a repayment schedule. We found that 6 employees were provided with the option of repaying their severance pay and/or redundancy pay over a period of time. Five of these 6 employees accepted this repayment option. These repayment options contravened the Financial Administration Act. We also found that 4 of these 6 employees had their repayment calculations, in part, based on their new lower salaries rather than the salaries on which their severance pay and/or redundancy pay was based. The departments, therefore, reduced the amounts the employees were required to repay. In our opinion, under Section 17 of the Financial Administration Act, there is no authority for Departments to reduce amounts owing by rehired employees and therefore the reductions contravene the Act. In all 4 cases the departments are reducing the amounts owed by the employees based on the employees new lower salaries. However, employees are repaying the gross amount received and not the net amount received as is allowed in accordance with the General Service Collective Agreement signed 21 April This resulted in 3 of the 4 employees actually paying more than they would have if the provision in the Collective Agreement was followed. However in the fourth case, because of errors in the calculation of the amounts due, the employee will not pay the amount they were required to repay. (b) Non-compliance with Government s Re-employment Priority Policy Government policy requires that employees who receive severance and/or redundancy pay and who are subsequently rehired shall be required to pay back part of any severance pay Auditor General of Newfoundland 109

8 and/or redundancy pay they received. The amount that the employee has to repay shall be based on the length of time the employee has been out of the public service. We found 3 rehired employees who did not repay their severance pay and/or redundancy pay in accordance with Government policy and Government did not pursue collection of amounts due. We also found an instance where an employee s repayment amount was based on the individuals new higher salary and resulted in the employee repaying more redundancy pay than was originally received. Other Comments One employee received $53,037 comprised of $20,565 in severance pay and $32,472 in redundancy pay. The employee s position was declared redundant on 20 May 1997; however, on 13 May 1997 one week prior to their termination, Government and the employee entered into a contract whereby the employee would continue to be employed with Government. I am concerned that Government would enter into an arrangement which provided severance pay and redundancy pay totalling $53,037 to an employee while ensuring that the employee retained a position within Government with exactly the same salary and benefits. In addition, as a result of the overlap in the contract commencement date and the employee s redundancy date, the employee was paid $1,298 for six days as a salaried employee and $1,298 for the same six days under their employment contract. The employee did not repay any of the severance pay of $20,565 or any of the redundancy pay of $32,472 since contractual positions are not covered by the repayment terms of the policy. In addition, the employee did not repay any of the duplicate salary payment of $1,298. In 1998, a former employee of a health care corporation terminated employment and received a payment of $30,000. This did not represent severance as the employee accepted employment with another public service entity and, in accordance with Government policy, carried the years of service forward to that entity. There was no authority for the corporation to pay this $30, Auditor General of Newfoundland

9 Recommendations Government should comply with the Financial Administration Act. Government should identify all employees who received severance pay and/or redundancy pay and who were subsequently rehired and ensure that all amounts required to be repaid by these individuals are repaid. Treasury Board Secretariat s Response Treasury Board does not agree with the Auditor General s interpretation of Section 17 of the Financial Administration Act (FAA). The repayment of monies as a result of the rehire of a redundant employee is not captured under Section 17 because there was no settlement of the owed amount. In other words, Government did not negotiate to take less than the amount it was entitled to recover. All that occurred was the determination of the amount of the debt owed and the repayment of monies over a period of time as opposed to by lump sum payment. From a practical perspective, the employing Department or Agency is the most appropriate vehicle to recover monies from the staff they hire. Treasury Board will direct Departments and Agencies to ensure this is done. Compensation policies in Crown Corporations may not be identical to Government s because of legislation. Some Crown Corporations have been vested with significant latitude in their compensation and related policies by the legislature. For this reason MC may not be universally applied. It is noted that legislation normally overrides policies established by MC. There is no universal review by Government to ensure compliance with the repayment options. Again it is felt the employing Departments or Agencies are the most appropriate vehicle to achieve the repayment of monies. Treasury Board will direct Departments and Agencies to review their payroll files to determine if any cases exist where some corrective action needs to be taken. The terms and conditions of the Collective Agreement, including any issues of what is equitable, have been negotiated and agreed to by the parties to the Agreement ie. the union and the Employer. We intend to review the manner in which the agreement is being interpreted, in light of the Auditor General s comments. Treasury Board Directive states, in part, that: 1. An employee is obligated to repay severance and redundancy entitlements under the following conditions: Auditor General of Newfoundland 111

10 (i) (ii) (iii) if a person is reemployed into a permanent position during the redundancy notice period, he/she has to repay all his/her severance pay and the portion of redundancy pay which overlaps with his/her period of reemployment. if a person is reemployed into a temporary or seasonal position during the redundancy notice period, he/she has to repay the portion or redundancy pay which overlaps with his/her period of temporary or seasonal reemployment. However, he/she is not required to repay severance pay. if a person is permanently, temporarily or seasonally reemployed after his redundancy notice period expires, he/she is not required to repay either the severance or redundancy pay. 2. Employees who are required to repay redundancy and/or severance entitlements have the option of making lump sum repayments, or negotiating a repayment schedule acceptable to management based on their ability to pay and the salary earned in their current position. The Human Resources Division is responsible for negotiating the repayment schedule. The Auditor General feels that this violates Section 17 of the Financial Administration Act. Her draft report indicates her view that repayment be based on the employee s net pay but repaid at the former rate of pay. As noted above, Treasury Board requested repayment of the gross amount but repaid at the rehired employee s current rate of pay. The Auditor General has raised issues concerning the repayment of severance and/or redundancy payments by employees who were subsequently rehired that require further review. Treasury Board will review this issue further and report back. 112 Auditor General of Newfoundland