The Ontario Divisional Court recently grappled with this issue in a decision released this month: C.A.W. v. Kitchener Frame Ltd. 2010 ONSC 3890. This was a judicial review of an arbitration award concerning entitlement to severance pay under the Ontario Employment Standards Act, 2000 (“ESA”) for employees who retire with unreduced pension benefits.  

Kitchener Frame Ltd. closed an automobile parts manufacturing facility in late 2008 and early 2009. The employees that were the subject of the initial arbitration award were represented by the C.A.W. The union had negotiated generous plant closure benefits for its members, including special early retirement provisions, supplementary bridge benefits equivalent to the amount of Old Age Security benefits payable from age 65 and an early retirement allowance.  

The ESA requires the payment of severance pay equal to one week per year of service to a maximum of 26 weeks in the event of the termination of the employment of an employee with at least five years’ service, if the employer either has a payroll of at least $2.5 million, or if the employer is terminating at least 50 employees within a six-month period as part of a discontinuation of business at an establishment.  

The issue between the parties was whether employees who retired on pension as part of the closure were entitled to severance pay under the ESA. The ESA generally provides that employees who are entitled to unreduced pension benefits are not entitled to severance pay under the statute. Specifically, section 9 of regulation 288/01 to the ESA provides that the following employees are not entitled to severance pay:  

An employee who, on having his or her employment severed, retires 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.

The question of what constitutes an “actuarially unreduced pension benefit” is complex. It is not defined under the ESA. Nor is it defined under the Ontario Pension Benefits Act (“PBA”). In general pension parlance, it refers to a pension that is commenced prior to the normal retirement date and that is not reduced on account of the early commencement.

For example, a $1,000 per month pension commencing at age 62 that would normally commence at age 65 in the same monthly amount would be said to be actuarially unreduced because no reduction is applied to the amount of monthly pension. The loss of additional pension service between age 62 and 65 is not taken into account in determining whether a pension is actuarially unreduced.  

The term “actuarially unreduced pension benefit” was the subject of arbitral jurisprudence under the prereform (pre-2000) ESA. The jurisprudence held that in the determination of whether a pension benefit is actuarially unreduced, the use of commuted values was not appropriate and the value of bridge benefits and other extra or ancillary benefits should not be included.  

Further, and more importantly, the loss of service between the early commencement date and age 65 on account of termination of employment would constitute a reduction in benefits. This was the case, regardless of any other special early retirement benefits provided under a pension plan. Many believed this interpretation dating from 1987 was incorrect and contrary to the common usage of the term “actuarially unreduced pension benefit.”  

The arbitrator in the Kitchener Frame case set aside the jurisprudence under the pre-reform ESA. The Divisional Court deferred to and upheld the arbitrator’s decision, as follows:  

  • Given the changes to the ESA 2000, the jurisprudence under the pre-reform ESA was not applicable.
  • The wording in the regulation that refers to service credits that the employee would have expected to earn in the normal course, refers to the value of benefits under the pension plan and whether a plant closure, by cutting short the opportunity to earn service credits, might prejudice the overall value of an employee’s pension benefits.  
  • The mere fact that an employee has lost the opportunity to earn further credited service to the normal retirement date does not constitute a reduction in pension benefits. In other words, an employee who “loses” this credited service may still retire with an actuarially unreduced pension benefit and be disentitled to severance pay under the ESA.  
  • The determination of whether a pension benefit is actuarially unreduced takes into account bridge benefits and other ancillary benefits.  
  • The commuted value of the pension benefits is used in comparing pension benefits earned upon plant closure and those earned in the normal course.  

In comparing the commuted value of the pension benefits earned by the employees in the event of a plant closure, including the value of the bridge benefits, early retirement enhancements and other ancillary benefits, with the value of the pension benefits the employees would have earned in the normal course (ie., if the plant had not closed), the arbitrator found that the benefits upon plant closure were actuarially unreduced. Therefore, the employees were not entitled to severance benefits under the ESA.  

The Divisional Court quoted from the arbitrator’s decision as follows:  

The Employment Standards Act and Regulations are designed to provide severance pay to employees who do not have those benefits. It also provides exemption from liability to severance pay to employers who have accepted the financial responsibility of providing equal or better benefits to their employees. The affected employees in this case are receiving benefits equal to or greater than what they would have received if the plant had not closed. This is clearly the result of the Union’s foresight and bargaining acumen, securing for its members a very valuable asset.

A key finding of the arbitrator was that the value of the bridge benefits and other supplemental early retirement benefits were provided specifically in the event of and were triggered by a plant closure. Further, the actuarial evidence confirmed that the value of these additional benefits exceeded what the employees would have received as severance pay under the ESA.  

The Divisional Court also considered the standard of review that was appropriate for the court to use in reviewing the decision of an arbitrator. The general principle is that a “reasonableness” standard will apply if the decision is within the arbitrator’s expertise. The Ontario Labour Relations Act gives arbitrators the power to interpret and apply human rights and other employment-related statutes. These matters are within an arbitrator’s expertise.  

There is a clear line of caselaw holding that the ESA “lies at the core of the work of labour arbitrators in the employment law sector,” thereby supporting a “reasonableness” standard in these matters. If a decision of an arbitrator falls within the range of acceptable and rational conclusions, it will not be overturned using the reasonableness standard.  

The court also had to turn its mind to whether the pension aspects of the arbitrator’s decision were also subject to the reasonableness standard, or whether the stricter “correctness” standard would apply. The court found that the pension aspects of the arbitrator’s decision were not “stand-alone” pension issues. Provisions of the PBA were referred to only in order to assist in the interpretation of the ESA. The reasonableness standard therefore also applied to these aspects of the arbitrator’s decision.  

In conclusion, the court held:  

In my view, the decision of Arbitrator Knopf is a thoughtful analysis of the prior and current legislative regimes as they apply to the particular pension plan and employees here. Her decision is wellreasoned and articulate. It is entitled to deference. There is no basis upon which it could be said to be unreasonable and no basis for this court to intervene.  

This is the first significant decision on this provision of the ESA since it was reformed in 2000. While employers may be relieved that the decision confirms that the mere loss of the opportunity to earn further credited service in a pension plan does not automatically entitle an employee to severance pay under the ESA, the converse is also true.  

Just because an employee will retire early on pension that does not apply any reduction prior to the normal retirement date, will not automatically disentitle an employee to severance pay under the ESA. The regulation under the ESA requires that any loss in service credits be taken into account in determining whether an employee’s pension benefits have been prejudiced.  

In determining whether severance pay is properly payable under the ESA for employees retiring on pension, employers, unions and arbitrators will be required to compare the value of pension benefits earned in the normal course with those provided upon termination of employment. The mere absence of an early retirement reduction applied to a pension for commencement prior to the normal retirement date might not be sufficient to avoid the ESA severance obligations