Severance obligations can of course be costly for employers. An often-tricky issue is the impact of post-termination income on the obligations of the terminating employer. Employees are often under the mistaken impression that they have a unconditional entitlement to a large lump sum severance payment -- even if they were to quickly start a new job -- and even if they receive other income during the period for which they are entitled to notice of termination or pay in lieu of notice.

A recent Ontario court decision, Jensen v. Schaeffler Canada (PDF), has provided some guidance on the impact of one form of post-termination payments - workers' compensation benefits. This case may have a bearing on how various kinds of post-employment income should be treated in assessing employees' entitlement to damages for wrongful dismissal.

Facts of the Case

Ms. Jensen was a long-term (28 year) employee of Schaeffler Canada, working as a production worker. At the time of her termination, Jensen was enrolled in Ontario's Workplace Safety and Insurance Board ("WSIB") Labour Market Re-entry Program. This Program provides one form of benefits under the statutory workers' compensation scheme. It provides income replacement benefits when a worker has been injured at work and is being re-trained for a different occupation.

Jensen and the Company could not agree on her entitlement to notice of termination or pay in lieu of notice. The trial judge concluded that Jensen was entitled to a notice period of 15 months, plus an additional 3 months to compensate for the difficulty her disability posed for finding new work.  So her entitlement totaled 18 months' pay in lieu of notice.

The lost earnings for the 18-month notice period were less than the funds already received by Jensen from the combination of WSIB benefits and the termination pay and severance pay provided under the minimum standards laws, the Employment Standards Act.  The employer argued that all such amounts should be set off from the damages award.

The Court Decision

The trial judge agreed with the employer. The judge followed the reasoning of the Alberta Court of Appeal in a 1985 decision which noted that if the money had come from earnings from a complete stranger, it would be deductible. Thus, as a matter of policy, income ought also to be deducted from the damages award where it is paid from a fund sustained by the employer, such as the WSIB. This is particularly so where the benefits are in lieu of employment earnings and are to compensate the employee while unable to work because of a work place injury. As a result, Jensen was found to have suffered no losses during the notice period.

The Court did note that these WSIB payments would not be deducted from the minimum entitlements under the Employment Standards Act, as these entitlements are statutorily guaranteed.

In the result, Ms. Jensen received no additional payments from Schaeffler Canada.

Lessons for Employers

This decision provides strong support for employers' position that pay in lieu of notice should be reduced by any WSIB loss of earning benefits received by an employee during the notice period. This argument can also be extended to other benefits received, such as disability benefits, particularly where the plan has been purchased by the employer.

One must keep in mind, however, that the impact of other income on an employer's severance obligations is an individual determination to be decided on a case by case basis. Much will turn on the nature and the source of the post-termination income.