As the prognosis for Canada's economy remains uncertain, the Canadian court system continues to churn out employment cases arising from distressed employers. On this front, two recent cases are of interest. In the first, an Ontario court concludes that employees may not be entitled to statutory severance pay when they are provided with pension bridging and supplementary benefits. In the second, a British Columbia court is more employee-friendly, giving a broad interpretation to the definition of wages.

Ontario Employees Not Entitled to Severance Pay

In Ontario, employees with at least five years service are generally entitled to up to 26 weeks severance pay when their employer discontinues its business (view Ontario Employment Standards Act). Employers are exempt from this severance pay obligation where an employee retires on termination and receives an "actuarially unreduced pension benefit that reflects any service credits which the employee, had the employment not been severed, would have been expected to have earned in the normal course of events for purposes of the pension plan." Just what counts as an actuarially unreduced pension benefit that reflects service credit? The Ontario Superior Court of Justice considered that issue in the recent Kitchener Frame decision.

In this case, the union representing employees obtained generous pension benefits for some employees, including bridging and supplementary benefits upon plant closure. The employer argued that these benefits constituted an "actuarially unreduced pension benefit" reflecting their service credits. In its view, the employees were not entitled to statutory severance pay.

The argument proceeded to arbitration first. The arbitrator decided that it was appropriate to take into account the bridging and ancillary benefits that were being provided to the employees. As such, the employees were not entitled to severance pay.

The union asked a court to review the arbitrator's decision, but didn't have any better luck there. The Ontario court said that it was reasonable for the arbitrator to include supplementary benefits in her analysis of whether the pension benefit was actuarially unreduced. The court also agreed with the arbitrator's decision to use commuted values to compare the pension benefits employees would receive on plant closure to what they would receive in the "normal course", noting that this approach was a standard accounting and actuarial practice.

B.C. Court Gives Broad Interpretation to meaning of Wages

A B.C. court was not as employer-friendly in Ted Leroy Trucking Ltd., v. Century Services Inc. where the court had to consider employees' claims for wages in a bankruptcy. The dispute in Ted Leroy Trucking was between the union representing Ted Leroy's employees and the highest ranking creditor. The union argued that an employee's priority under the Wage Earner Protection Program Act(the "WEPPA") for up to $3,000 (or an amount equal to four times the maximum weekly insurable earnings under the Employment Insurance Act) for wages from a bankrupt employer or its receiver extended to compensation in the form of payments to third-parties - union dues, contributions to a health and welfare trust, payments to a health coverage provider, and payments to its humanity fund and an education trust fund. Against this, the highest ranking creditor argued that this legislation only protected funds payable directly to employees - it did not extend to money paid on their behalf to third-parties.

In dispute was the definition of "wages" in WEPPA:

"wages" includes salaries, commission, compensation for services rendered, vacation pay, severance pay, termination pay and other amounts prescribed by regulation.

The case wound all the way up to the B.C. Court of Appeal. Surprisingly, the court agreed with lower court decisions that the disputed benefits were part of the compensation of employees entitled to protection under legislation. The reason? They were for the benefit of the employee and were part of the employee's compensation. The fact that benefits were not cited expressly in the definition of wages did not exclude them as part of the compensation package (view Federal Bankruptcy and Insolvency Act).

Significance of these decisions

The Kitchener-Frame case should give some comfort to Ontario employers. The loss of an employee's opportunity to earn further service credit because of a closure does not automatically trigger severance pay. Rather, an employer is entitled to examine the commuted value of the employees' pension benefits provided as a result of supplemental and bridging benefits against those that would have been earned in the normal course of events. To do otherwise would be to ignore the real effect of the termination on the affected employees.

The Ted Leroy Trucking case will likely be relied on across Canada for its employee-friendly approach to the definition of "wages" whenever bankruptcy laws and WEPPA are engaged in future distressed employer scenarios.