The Lawyers Weekly - August 6, 2010

PAUL
LITNER

A complex subject is about to get a bit more complicated, at least in Ontario, as recent amendments to the Ontario Pension Benefits Act (PBA) will extend the entitlements of terminating employees under registered pension plans.

The treatment of employees’ pensions and other benefits is an important component of termination of employment situations, and can often be the source of disputes. For instance, the issue of whether and how long to continue coverage and accruals under employer pension and other benefit plans is a frequent point of contention in negotiating termination packages, and has often been contested before the courts.

Under common law, employees
who are involuntarily terminated
by their employers (without cause)
are entitled to reasonable notice
of termination, or pay in lieu of
notice. A corollary of this princi-
ple is that employees who are
wrongfully terminated are entitled
to be put in the same position that
they would have been had they
continued in active employment
to the end of the reasonable notice
period (subject to the duty to
mitigate damages).

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is not possible, the general rule is that an employer who terminates an employee without cause is liable for damages, measured by the loss of salary and other benefits that would have been earned during the reasonable notice period. In other words, a terminated employee is entitled to damages for the difference between the benefits the employee is entitled to from the plan and what he or she would have been entitled to had employment continued to the end of the notice period (Taggart v. Canada Life Assurance Co., [2006] O. J. No. 310 (C.A.)).

These principles are easy
enough to state, but implementing
them in practice can be complex:

; Employment standards legislation deems terminated employees to be employed to the end of the statutory minimum notice period, for benefit plan purposes. As a result, the termination package should include plan participation/ benefit accruals to the end of the statutory notice period;

; Allowing employees to remain covered under registered pension plans beyond the statutory notice period can be risky. If the employee is on salary continuance, and their income is treated as “employment income” (as opposed to a “retiring allowance”) for purposes of the Income Tax Act (Canada) (ITA), then pension plan participation and accruals can continue for the duration of the notice period;

; If the employee receives a lump sum severance payment, then the ITA will restrict accruals of benefits and/or making of employer contributions under registered pension plans beyond the end date of the statutory notice period;

; In situations where continued pension accruals are not possible, the employee is entitled to damages for the lost benefits accruals. But putting a value on these accruals can often be complex, particularly for defined benefit pension plans. And since pension plans are tax-deferred arrangements, it has been held by some courts that the employer should have to gross-up such amounts such that the employee is kept whole on an “after tax” basis.

Employers must also now consider recent changes to the PBA made by Bill 236, which received royal assent on May 18. In particular, Bill 236 introduced new “immediate vesting” provisions and expanded the application of “grow-in” benefits under the PBA. These will have important implications for terminating employees and will likely increase the cost of termination packages for employers who sponsor registered pension plans.