Employees in Canada are usually entitled to receive reasonable notice of termination or pay in lieu of notice unless fired for cause. However, if employees receive pension or sick leave payments during the notice period, are they entitled to both their regular salary in lieu of notice and such pension or sick leave payments? Should the latter amounts be deducted from the salary otherwise owed by the employer in respect of the notice period?
Depending on the circumstances, dismissed employees may be entitled to draw on their pension immediately on dismissal. This might start during the period for which they would otherwise receive pay in lieu of notice. Alternatively, employees may be terminated while on sick leave and in receipt of short or long-term disability benefits; this might seem like double recovery. Can employees legitimately demand that their employer put them in a better situation than they would have been in had their employment not been terminated (at least for that notice period)?
Legally, it depends. The issue used to be quite complex; the question of who had paid for the pension or disability insurance plan was central to the analysis.(1) Although this is still a factor, in 2013 the Supreme Court of Canada stated that it should no longer be given much weight.(2) The new rules are easier to apply.
There are always going to be exceptions; however, the short answers to these questions are outlined below.
Pension benefits As a general rule, when an employee has directly or indirectly contributed to a pension plan, he or she is entitled to both the pension and the pay in lieu of notice. This is because pension benefits are a type of retirement saving. They do not constitute an indemnity (ie, wage loss coverage) due to unemployment.
Disability benefits Conversely, as a general rule, short or long-term sick leave payments received by a dismissed employee during the reasonable notice period would reduce the pay in lieu of notice owed by the employer.(3) This is because disability benefits are intended to act as a wage replacement; therefore, their purpose is essentially the same as that for pay in lieu of notice.
Principle and exceptions
In Canada, it is a general rule of contract law that – except in special circumstances – where a contract is breached, damages are awarded to place innocent parties in the economic position that they would have been in had the contract been performed. Damages are restorative in nature. This is also generally true of damages for wrongful dismissal, since that is considered to involve a breach of the employment contract. Employees must be "made whole" by being awarded pay in lieu of notice for a reasonable notice period.
However, terminated employees may enjoy certain advantages over and above pay in lieu of notice. In some cases, employers can be credited for those advantages.
One example of a case where double recovery by the employee is allowed is when the private insurance exception applies. This exception provides that benefits received by an employee through private insurance (or through other benefits analogous to private insurance) are not deductible from the amount otherwise payable by the employer to the employee.
The nature and purpose of the benefit can help to decide whether it falls under the private insurance exception. The fact that the benefit constitutes an indemnity for the type of loss caused by the breach is highly relevant. If the benefit is not paid to compensate the employee for the type of monetary loss suffered (eg, loss of salary), the arguments in favour of deducting it from the pay in lieu of notice are weaker. Conversely, the closer that the benefit constitutes an indemnity against the loss caused by the breach (eg, loss of salary), the stronger the case for deduction.
When considering whether the deduction of pension or disability benefits from pay in lieu of notice is appropriate, employers should examine the nature and purpose of the plan. Pension benefits will often be non-indemnity in nature, and thus will not reduce the pay in lieu of notice that an employer must pay. However, sick leave benefits will generally be indemnity in nature, thereby offsetting the employer's severance obligation.
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