Former employees of Nortel Networks Corp. (TSX:NT) are urging the company to restore severance payouts that were suspended when the telecom equipment maker got court protection from its creditors.

The situation with Nortel severance payments is highly questionable:

December: Hey, we're having some financial problems and in leu of layoffs we're offering these severance packages to anyone who is willing to take one. You'll get 6 months pay while you are looking for a job.

January: We're bankrupt. We're halting payments on all severance packages. Ya'll can line up behind all the secured creditors, and no, there won't be any money left when we're done, and no, you won't find that out for a couple of years.

Nortel didn't suddenly wake up in January and decide to declare bankruptcy - thats something you plan for and anticipate, which means they knew when they offered these severance packages to employees that they had no intention of making good on them.

This goes beyond the normal situation where earnest commitments are broken in the course of a bankruptcy proceeding. It seems clear that these commitments were made in bad faith to begin with.... that severance packages were fraudulent, which raises serious employee relations questions for the company.

I think legislation is needed here. These people were completely blindsided. But until such legislation is enacted, don't take severance from a company in financial trouble unless they offer to pay it in a lump sum.