Digest of Benefit Entitlement Principles  Chapter 5 - Section 12

5.12.0 Moneys paid or payable by reason of a lay-off or separation

When an employer-employee relationship is temporarily or permanently severed, certain rights and expectations exist. In the workplace, the employee's rights are protected by labour or contractual agreements and by statutory requirements.

Employees have the right to receive adequate notice of impending lay-offs, or at least pay in lieu of that notice. When the termination of employment is permanent, employees may expect to receive compensation, such as severance pay (Digest 5.12.6) retirement payments (Digest 5.12.7), or payment for the loss of that employment. Other moneys such as vacation pay (Digest 5.10.0), statutory holiday pay (Digest 5.7.2.1), commissions (Digest 5.8.0), accumulated sick leave credits (Digest 5.12.8), or bonuses (Digest 5.14.0) may also be owed at the time of lay-off or separation. If the employer does not pay these moneys, or makes an insufficient or otherwise unsatisfactory offer to settle any amounts owing, an employee may take action through their union, a labour arbitration process or through the Courts (Digest 5.12.11 to 5.12.13).

It is reasonable to conclude that moneys paid or payable as a result of or at the time of a lay-off or separation, are paid by reason of that lay-off or separation. However, if a claimant can show that the payment was only coincidental to the lay-off or separation, the earnings cannot be said to be paid or payable by reason of a lay-off or separation (FCA A-140-03, CUB 56407). Similarly, if it is established that earnings paid or payable prior to the termination of employment were really paid by reason of the lay-off or separation, these earnings are treated as earnings paid or payable for that reason.

5.12.1 Definition of lay-off or separation

Normally the last day of work coincides with the date of lay-off or separation and the allocation commences from that date. However, in some cases, a separation may occur during a period of lay-off resulting in a date of separation different from the last day of work. When this occurs and termination moneys are paid or payable, it is essential to determine which event triggered the right to the moneys; the lay-off, or the separation. When termination moneys are paid as a result of the later separation and not because of the earlier lay-off, the allocation of earnings commences from the date of the later separation (FCA A-392-07, CUB 68663).

Lay-off
Lay-off normally refers to a temporary stoppage of work, or to a period of inactivity or idleness, that is, a shortage of work, or a general vacation period. During a lay-off period the employee often retains residual employment benefits such as recall or seniority rights. The lay-off may last for only a few days, or it may be for a substantial period. The key is whether the employer considers the person an employee with certain rights or obligations during the period of lay-off.
Separation
A separation refers to the final and complete severance of the employer-employee relationship. Usually it involves a dismissal, a restructuring, a closure or a voluntary separation. A separation may occur immediately on the last day of work. It may also occur during a lay-off, when recall rights expire or are surrendered (Digest 5.12.6.1), or it may be the result of an event unrelated to the original stoppage of work, such as a later decision to close the plant.
Termination
The terms termination, termination moneys, or termination earnings are often used in reference to either a lay-off or a separation. The word refers to a stoppage of work and any moneys paid in relation to that stoppage.

5.12.2 Lay-off or separation moneys: Income arising out of employment

The nature of any moneys paid or payable at the time of a lay-off or separation must be examined to determine whether they are part of the entire income arising out of employment. The payment of severance pay, pay in lieu of notice, and vacation pay is intended to compensate for the loss of wages or other benefits or advantages related to employment, or to pay out unused entitlement to certain benefits under the terms of the contract, collective agreement or legislation. As such, these moneys are income arising out of the employment relationship with the employer.

Moneys paid by an employer, or any other person, at the time of, or by reason of a termination of employment, are payable in relation to that employment. Payments made by reason of a lay-off or separation are intended to compensate for the loss of wages and other benefits related to that employment, unless there is evidence to the contrary. Any income arising out of employment and paid by reason of a lay-off or separation is earnings to be allocated.

If the claimant is able to establish that the payments are not related to the employment, or are not intended to compensate for the loss of wages or other employment-related benefits, the moneys are not earnings. For instance, a payment made after the termination of employment that is intended to reimburse a job-related expense, or money paid to compensate for losses unrelated to advantages arising from employment are not income (Digest 5.12.2.1; Digest 5.12.11; Digest 5.12.13).

A payout of equity in a business (that is, a return of the amount a claimant invested in a business) is not related to employment, even if the claimant was employed by that business (FCA A-572-95, CUB 28759; Digest 5.16.0). If a payment does not arise out of employment, it is not earnings (Digest 5.3.1.6).

Relying solely on the terms used by the parties involved to describe payments is sometimes insufficient. When doubt exists about the true nature of separation payments, the intentions of the parties must be examined by reviewing all relevant documents and contacting all parties involved (CUB 53378). Ultimately, the onus is on the claimant to provide adequate facts to show that any income received upon the termination of employment is not earnings (CUB 55218).

5.12.2.1 Expenses, costs, and allowances paid or payable by reason of a lay-off or separation

Proper notice or pay in lieu of notice is a legislated requirement in all provinces and generally cannot be substituted with other payments. When employment ceases, an employer may make payments in addition to pay in lieu of notice or severance pay. These additional payments may be referred to as expenses, costs, or allowances (for example, moving expenses, moving costs, or moving allowances). Although claimants and employers may use the terms interchangeably, an allowance differs slightly from a straight reimbursement of an actual expense or cost. An allowance is a set amount that is designed to reimburse an anticipated expense or cost associated with employment, or a set amount intended to mitigate the loss of employment (Digest 5.3.2; Digest 5.3.3.1; Digest 5.3.3.2). The same general principles apply whether the expenses are paid during employment or on termination.

The payment of job-related allowances and the reimbursement of job-related expenses and costs, are excluded as income when the moneys do not represent a gain or a benefit. On termination of employment, the definition of job-related expenses is expanded to include payments related to the loss of employment. Relocation costs associated with a move to another community, tuition and text-book costs associated with retraining, or other moneys specifically paid to reimburse actual expenses related to job loss and re-employment, are intended to mitigate the employment loss, and are not income.

Moneys provided as a living allowance while attending a course, cannot be treated in the same way as those provided to cover the direct, specific and actual costs or expenses associated with the termination, such as tuition fees or books, which are associated with the taking of a course. A living allowance is more like a wage or income replacement or income support allowance, and is intended to permit the individual to survive while attending the course. As such, a living allowance paid by an employer is considered earnings paid by reason of a lay-off or separation. However, a living allowance is not deducted from benefits if the claimant is attending a course, to which they have been referred by the Commission, or a designated authority (EIA 19(4); EIR 16(1)).

A claimant cannot claim an expense for which the employer did not expressly intend to reimburse. For instance, a decision to move to another location or to go to school, does not entitle the claimant to claim the expense of the move or the cost of the tuition and books, if the employer did not expressly intend to reimburse the claimant for these costs. The exception to this rule would be any expenses directly incurred to obtain termination moneys, such as legal fees, court costs and other legitimate expenses directly related to the legal action (Digest 5.12.11.4).

The best way for the claimant to prove that moneys are intended to compensate for an expense is to show that the employer either pays a third party directly for the expense, such as paying a moving company or university, or only reimburses the claimant the actual amount of the cost or expense when bona fide receipts are presented. The employer's statement to this effect is generally sufficient and the Commission does not require receipts from the claimant.

When the employer gives the employee a lump sum that is specifically intended to reimburse an expense or cost, the claimant must demonstrate that the cost or expense was actually incurred, by providing receipts. An exception to providing receipts would be for a relocation. Receipts are not required when the move, which the employer intended to compensate, actually occurred and the allowance paid by the employer is reasonable under the circumstances. Even when the expense or cost is less than the amount paid by the employer, the payment is not considered income. For example, the employer may calculate a moving allowance based on hiring a moving company, but the employee may rent a truck to move, and be able to keep the difference. As long as the employer based the payment on a reasonable estimate of the expense or cost, the difference is not considered a gain or a benefit. However, in the situation where the claimant moves to a closer location than that which the employer intended to reimburse, only the actual cost of the move can be considered; the balance is considered income. If the claimant does not move at all, then any payment made by the employer is considered a benefit to the claimant because there was no expenditure. The entire amount would therefore be considered earnings paid or payable by reason of the lay-off or separation and allocated (EIR 36(9); EIR 36(10)).

There may be situations where payments are made for job search and job training expenses, or costs that have not yet been incurred by the claimant. This may be because the claimant did not have the funds required to incur these expenses prior to receiving the moneys from the employer. In these situations, the claimant must demonstrate that there is a genuine intent to spend the moneys for the purpose for which they were paid, in order that these moneys not be considered earnings paid or payable by reason of the lay-off or separation (FCA A-567-99, CUB 42598A).

If the amount paid by the employer appears excessive in relation to the intended expense, or there is reason to doubt the validity of the payment, receipts would be required as proof of the expenditure. Excessive means exceeding the usual, proper, or normal and implies an amount too great to be reasonable or acceptable. When receipts are required and the compensation exceeds the receipts, the balance is considered income, and allocated. Likewise, when the expenditure did not actually occur, the Commission may conclude from the evidence that the money was intended to compensate for the loss of wages and would allocate the entire amount as earnings (CUB 33178).

When the amount of the expense or cost incurred exceeds the amount that was given in the agreement for a specific purpose, only that portion of a termination payment that was specifically intended to reimburse that expense or cost can be excluded as income. In other words, the costs that exceed the amount given by the employer for this specific purpose cannot be claimed to reduce other moneys that are earnings, such as severance pay or vacation pay.

5.12.3 Termination moneys used to purchase RRSPs or pension credits and to enhance pensions

Employees may choose to have termination earnings (for example, severance pay) which are payable on separation, sent directly to a financial institution to purchase a regular RRSP, or a non-commutable and locked-in RRSP. Whether the claimant accepts a cheque and deposits it into a savings account; accepts a direct deposit payment and purchases a RRSP; or has the employer purchase the RRSP, the result is the same for EI purposes (CUB 47731). The termination earnings are considered paid or payable by reason of the lay-off or separation and are allocated from the date of the event that gave right to the money (EIR 36(9); Digest 5.6.1). Purchasing a RRSP does not alter the nature of the earnings, nor the fact that the earnings were immediately due and therefore considered paid or payable. The critical factor is not where the employee ultimately directed the money, but rather the reason for the payment and the fact it was paid or payable. This does not include pension credits transferred from one locked-in vehicle to another.

The same is true when employees choose to have all or part of their severance or other termination pay deposited directly into their pension plan, in order to purchase additional pension credits and enhance their pension entitlement (CUB 42897). The choice to use one benefit (that is, the severance pay), to improve another (that is, the pension), does not alter the nature of the severance pay, nor the fact that it was paid or payable.

5.12.4 Allocation of earnings paid or payable by reason of a lay-off or separation

Once moneys are determined to be earnings paid or payable by reason of a lay-off or separation, the allocation always starts from the week of the lay-off or separation, whichever event was the reason for the payment (CUB 45664; Digest 5.6.1). The allocation is such that the total earnings from that employment are, in each consecutive week except the last, equal to the claimant's normal weekly earnings from that employment (EIR 36(9)).

If the earnings are paid by reason of a lay-off or separation, that fact remains the same, regardless of the method or date of payment. These earnings are allocated from the week of the lay-off or separation, and not from the date of payment.

Earnings paid or payable by reason of a lay-off or separation are allocated consecutively if there are other earnings from the same employment. However, they are allocated over the same period as any earnings from any other employment (Digest 5.6.3.1).

Termination earnings from past employments that might affect a current entitlement to benefits are also allocated. This is necessary because neither the act nor the regulations prescribe a maximum period of time over which the earnings may be allocated (FCA A-159-13, CUB 80192A). These earnings are allocated concurrently with any earnings from other employment.

If an allocation of earnings by reason of a lay-off or separation has already been made, any subsequent earnings paid or payable by reason of that same lay-off or separation are added to the previously allocated earnings (EIR 36(10)). The revised combined total is then allocated from the date of the lay-off or separation (EIR 36(9)).

The claimant's choice of the method or time of payment, a delay by the employer in issuing payment, or a payment of separation moneys made prior to the termination of employment, do not affect the period for which the earnings are allocated. Any allocation of earnings begins from the date of the lay-off or separation. In other words, the method or timing of payment only affects when the Commission takes action to allocate the money, not the period for which it is allocated. For example, if an employee chooses to receive quarterly payments for 3 years, the earnings cannot be allocated until each payment is made, because the earnings are not payable until each quarterly period arrives. Regardless of the number of payments made, there was not a series of lay-offs or separations and therefore only one event that triggered the claimant’s right to those moneys; the initial lay-off or separation (EIR 36(9); EIR 36(10)). Each subsequent payment is added to the termination money that has already been allocated, and the entire amount is allocated from the date of separation.

In this situation, if the claimant agrees, the entire amount that will ultimately be received in separation pay may be allocated immediately from the date of the lay-off or separation. By doing so, once the allocation has ended, the claimant will be entitled to benefits (assuming all other entitlement conditions are met) without the requirement to recalculate the allocation multiple times. However, if the claimant does not agree to this method of allocation, then an allocation can only be amended each time a payment is made.

On the other hand, if the payment is only delayed because of administrative reasons, such as the timing of the employer’s payroll run, the earnings are still payable and would be allocated immediately, even if the actual payment has not yet been made (Digest 5.6.1).

5.12.5 Wages in lieu of notice

By law, an employer must give employees adequate notice of a lay-off. Wages paid in lieu of notice (also known as pay in lieu of notice) are payments made when the employer has been unable to provide sufficient notification of a lay-off or separation. The termination of employment may involve a complete severance of the employer-employee relationship, or it may simply be a temporary lay-off, where the period of lay-off may or may not be known.

Usually the calculation of the number of weeks of notice that must be given, or paid, is based on the number of years the employee has been employed by the company. Provincial legislation generally dictates the minimum notice that must be given. Collective agreements, company policy or the circumstances of the lay-off may prescribe a greater period. The employer can:

  • give the proper notice and expect the employee to work during the notice period
  • release the employee immediately without notice and pay wages in lieu of notice, or
  • provide both a proper notice period and pay wages in lieu of notice

Occasionally wages in lieu of notice may be paid when there is no requirement to do so, such as, when an employee is dismissed for cause.

In some provinces, if a lay-off is expected to last less than a specific period of time set by that province's legislation, wages or pay in lieu of notice do not need to be paid when the employee ceases to work. Even when the lay-off is for an indefinite period, which may exceed the time period set by legislation, the employer may delay payment until the time limit is reached. When the lay-off exceeds this legislated time period, the lay-off is no longer considered temporary, and wages in lieu of notice, if not already paid, become payable. In these cases, it will have to be determined which event triggered the payment; the initial lay off, or the complete severance of employment. Allocation of wages in lieu of notice will begin from the date of the event that triggered the payment.

Decisions regarding the allocation of wages in lieu of notice must be made on a case-by-case basis, in accordance with the applicable labour standards legislation, and the specific facts of each case. Whether wages in lieu of notice become payable upon the temporary lay-off or upon complete severance of employment, depends on the relevant employment standards legislation that governs those payments.

In cases where the initial lay off is permanent, regardless of when wages in lieu of notice are actually paid, they would be allocated from the date of the initial lay-off.

When a claimant on a temporary layoff is later separated from employment and receives wages in lieu of notice as a result of the complete separation, a determination must be made whether the moneys should be allocated from the week of the temporary lay-off or from the week of the complete separation from employment. In these cases, the trigger of the payment would need to be determined; is it the temporary layoff that occurred earlier, or the permanent separation from employment.

If the provincial or territorial labour standards deem that wages in lieu of notice are only payable upon complete severance of employment, the earnings will be allocated beginning on the date of the complete severance. In some provincial employment legislation, if the period of lay-off exceeds what is considered a temporary lay-off under that legislation, then the date of termination is deemed to be the date of the initial temporary lay-off. In those cases, the earnings will be allocated from the initial lay-off date.

If the employer issues wages in lieu of notice during a period of temporary lay-off, and the lay-off remains temporary (that is, no termination has occurred), the payment is allocated from the date of the initial lay-off.

5.12.6 Severance pay

Severance pay is a form of recognition for years of service and is paid to compensate for the loss of employment. It is almost always paid only when the employer-employee relationship completely terminates. Collective agreements or company policy may contain a clause requiring the payment of severance pay in certain circumstances. Factors such as length of service and the employee's position may dictate the amount of the payment. Severance pay paid in compliance with provincial legislative requirements is a legislated form of recognition for service, and the amount is based on a formula related to the years of employment with that employer.

Labour legislation, when applicable, may require the payment of severance pay immediately upon separation or when, by provincial statute, a separation is determined to have occurred. In those provinces where such legislation exists, the last day of work, that is, date of lay-off, is the date used to calculate the beginning of the lay-off period. When the claimant has not been recalled to work after a designated number of weeks or months, the provincial legislation states that a separation occurs at that time, and requires the payment of severance pay (Digest 5.12.6.1). In this scenario, the lay-off and separation have occurred at different times. Severance pay is payable by reason of the separation, which occurred only after a certain period of time had passed, and not by reason of the initial lay-off. In this case, the severance pay would be allocated from the week of the separation from employment. Wages in lieu of notice may also be payable and would be allocated from the week in which the lay-off or separation occurred, depending on which event gave right to the money (EIR 36(9); Digest 5.12.5).

Severance pay is earnings paid or payable by reason of a lay-off or separation. It is therefore allocated at normal weekly earnings from the week in which the lay-off or separation occurred, depending on which event gave right to the money (Digest 5.12.4).

Where a Court issues a valid Order directing the division of severance pay as a matrimonial asset, only the portion of the severance pay that the claimant retains, is allocated (CUB 29337).

5.12.6.1 Recall rights

The terms of a collective agreement, contract or company policy may state that a laid-off employee retains recall rights until they are surrendered, or a specified period of time expires. The payment of severance pay may then be linked to the surrender and expiration of recall rights. The issue to be determined is whether it is the lay-off or a subsequent separation of employment that is the reason for the payment of the severance pay.

When the payment of severance pay is dependent upon the surrender or expiry of recall rights, there is no entitlement to severance pay until one of those events occurs, resulting in a separation from employment (FCA A-392-07, CUB 68663). In this case, the severance pay is payable by reason of the termination of the employer-employee relationship (that is, the separation from employment), and not because of the cessation of work (that is, the lay-off). Allocation of the severance pay commences with the week in which the separation occurred.

Sometimes an employee does not wish to take immediate advantage of a legislative right to severance pay, if the right to the payment is conditional on relinquishing recall rights. If the option of maintaining the employer-employee relationship is available with the employer, the employee may be able to request that the severance pay be paid in trust directly to a provincial labour department. In some provinces, the severance pay must be paid in trust to the provincial labour department when an employee chooses to retain their recall rights. This ensures that the money is available to be paid at the time the recall rights expire. If the severance pay is only payable when a separation occurs, which might happen only when the recall rights are surrendered or expire, then the severance pay, even if paid in trust to a provincial labour department, is not considered paid nor payable to the claimant until one of the events occurs. Only when the severance pay is immediately due to the claimant can an allocation occur. When doubt exists, the provincial legislation and the employer's policy regarding recall rights must be examined.

In order to allocate severance pay beginning with the week that recall rights are surrendered or expire, first, there must have been a possibility of recall with that employer. If there was never a possibility of recall, allocation of the severance pay will start with the week that the lay-off occurred.

There may be cases in which recall rights are maintained, even though it may appear that they no longer exist due to a permanent reduction in the employer's workforce, closure at one of the employer's business locations, or receivership. As long as there is even a slight possibility of recall, severance pay would be payable at the time those rights are surrendered or they expire, and not from the date of the lay-off. The possibility of a recall can be with the same employer at the same location (if the employer continues to operate the business at a reduced level), at another of the employer’s business locations, with a successor employer (CUB 41053A), or with a receiver. When a business ceases operations entirely and there is no arrangement with a successor employer to maintain recall rights, or an employer is bankrupt, recall rights do not exist. As such, the permanent separation is considered to occur when the employer ceases operations or the bankruptcy occurs, ending the employer-employee relations. In cases where no actual recall rights exist, allocation should not take place until the severance pay is payable at the end of the recall period, unless the claimant agrees to allocation (Digest 5.12.4).

In other cases the severance pay is not linked to recall rights and is payable even though the employee still retains recall rights. When the payment of severance pay is not linked to the recall rights being surrendered or having expired, the severance pay is considered payable by reason of the lay-off, and would be allocated from that date.

Whether the severance pay is payable immediately by reason of the lay-off, and recall rights are not affected, or whether it is payable only when the separation is final and recall rights have been surrendered or expired, the employee may have the right to choose the method or time of payment. If the employee chooses to have multiple payments made over a specific period, the allocation of severance pay must be recalculated each time a payment is made. The amount of each additional payment is added to any previous amounts and is allocated from the date of the initial lay-off or separation, whichever event gave right to the payment.

5.12.7 Retirement payments

Retirement payments (also referred to as retirement benefits or allowances) are generally a form of severance pay. Retirement payments may be in lieu of severance pay (CUB 39180), in addition to severance pay, or an enhancement of severance pay. The term retirement does not necessarily mean the employee is retiring from the workforce, rather only from a specific employment. The payment may be paid periodically, or in a lump sum. Retirement benefits are usually paid from general company revenue funds, but any return of employer contributions is paid out of a pension fund. For the purposes of this section, retirement payments or benefits do not refer to pensions (Digest 5.13.5).

The amount of the retirement payment may be based on years of service, or a formula related to the number of months left before the employee reaches early or normal retirement age. The employer may be fulfilling a contractual obligation to a departing employee, offering a gratuitous payment in consideration of the employee’s circumstances, or offering an early retirement incentive outside the usual terms of the employment contract.

Lump sum or periodic retirement payments are often offered as an incentive for early retirement. These incentives can be offered in many different forms. Some employees may be given a leave of absence with full or reduced pay prior to going on pension. The continuance of an employee's salary, even without the performance of services, would prevent an interruption of earnings. However, if an interruption of earnings from another employment has occurred, allowing the claimant to establish an EI claim, the salary continuance earnings are allocated on that claim, to the period for which they are payable (EIR 36 (5)). If the employee is receiving their usual pay for the period of leave, there may be an issue of not unemployed that must be addressed (Digest Chapter 4). In other cases, the claimant may cease to be an employee, yet still receive a periodic payment equivalent to the normal salary, or a reduced salary. The reduced salary may equal what the pension would be. This is a type of bridging benefit, but it is not a pension bridging benefit (Digest 5.13.5.2). If the claimant is no longer an employee, the payments are considered paid or payable by reason of the lay-off or separation and allocated like all other termination earnings (EIR 36(9); EIR 36(10)).

A payment of all or a portion of the employer's pension contributions that were not locked in to the pension fund, is also considered a type of retirement benefit. Such payments are earnings, whether made under the terms of the pension plan, or as a gratuitous payment by the employer, as they arise out of employment (Digest 5.13.8.2). Since they were paid by reason of a lay-off or separation, they would be allocated in the same manner as any other termination payment (EIR 36(9); CUB 60041). A return of the employee's own pension contributions has no impact on EI benefits, as these moneys were part of the claimant's gross earnings during the period of employment (EIR 35(2); EIR 36(4); EIR 36(5); Digest 5.13.8.1).

5.12.8 Accumulated sick leave credits

The payment of accumulated sick leave credits is a form of compensation for all or a portion of an employee's unused sick leave. If they are paid at the time of a lay-off or separation, or on an anniversary date, these moneys are not paid to compensate for incapacity (Digest 5.11.1; Digest 5.11.2). Compensation for unused sick leave credits or payments based on some type of sick leave formula, may be given different names by employers and employees. Regardless of the name given to the money, it is income arising out of employment and therefore, earnings that must be allocated (EIR 35(2)); CUB 26528A).

When any payment, including the payment of accumulated sick leave credits, is made by reason of a lay-off or separation, the earnings are allocated from the week of the event that gave right to the money (EIR 36(9)). However, if the reason for the payment of the accumulated sick leave credits is because the employment contract requires it be paid on an anniversary date, then the earnings are only allocated to the week of the transaction, (that is, the week of the anniversary date) (EIR 36(19)(b); FCA A-1028-91, CUB 20198).

5.12.9 Wage Earner Protection Program

The Wage Earner Protection Program (WEPP) provides for the payment of outstanding eligible wages to individuals whose employer is bankrupt or subject to a receivership within the meaning of subsection 243(2) of the Bankruptcy and Insolvency Act. This program compensates employees up to an amount equal to 7 times the maximum weekly insurable earnings under the EI Act. It may include payments for loss of wages, unpaid vacation pay, severance pay and wages in lieu of notice. The government department that administers this program meets the criteria of any other person, as defined by the EI legislation (EIR 35(1); Digest 5.3.2). As such, a payment pursuant to WEPP is income arising out of employment (EIR 35(1); CUB 77210; Digest 5.3.1).

Payments made to compensate for unpaid wages are allocated to the period in which the work was performed (EIR 36(4)). Other WEPP payments such as vacation pay, severance pay and wages in lieu of notice are considered paid or payable by reason of the lay-off or separation, and are allocated from the date of the event that gave right to the money (EIR 36(9), EIR 36(10)). The event that gives rise to the payment is the separation from the employer and not the settlement of the bankruptcy, or when subsequent employment with the trustee ends (CUB 40137; FCA A-560-94, CUB 25305).

5.12.10 Fringe benefits

The value of some non-pecuniary fringe benefits is not allocated when these fringe benefits are received during periods of employment (Digest 5.3.2.2). This would include any of the following fringe benefits that are not a normal part of an employee’s wages:

  • insurance type benefits
  • savings obtained by financing or purchasing through the employer (for example, reduced interest on loans or mortgages)
  • staff discounts on product purchases, or subsidized meals
  • free use of an employer’s product or service such as:
    • free transportation for airline, rail, bus employees or car rental employees
    • free hotel stays for hotel employees
    • free or subsidized attendance at courses for school employees or their dependants

The value of these non-pecuniary fringe benefits is not allocated, even if the employer continues to provide them after the employee has stopped working. This may occur when the employer continues health or dental insurance coverage, or allows the free use of a company product (for example, a cell phone) during the period of lay-off, or for a specific period beyond the separation from employment.

If the employer pays the claimant moneys in lieu of offering the insurance-type non-pecuniary fringe benefit, these moneys must be allocated because the fringe benefit is no longer non-pecuniary and is a benefit or advantage arising out of employment (EIR 36(9); EIR 36(10)). This remains so, even if the claimant uses the money to purchase the insurance coverage the money was intended to cover.

When the termination moneys include a payment in lieu of a non-pecuniary fringe benefit, the calculation of normal weekly earnings includes the value of the compensated non-pecuniary fringe benefit.

Termination moneys may not include a payment in lieu of non-pecuniary fringe benefits as such, however the employer may base the calculation of the amount of termination moneys on the employee's basic salary, plus the value of the weekly non-pecuniary fringe benefits the employee received when employed. In these situations, normal weekly earnings include both the basic salary and the value of the weekly non-pecuniary fringe benefits.

5.12.11 Damages for wrongful dismissal

Determining whether an award for damages for wrongful dismissal is income arising out of employment uses the same process as any other moneys paid as a result of a termination from employment. Actions lodged for wrongful dismissal may cover a variety of issues ranging from abusive dismissal, failure to give proper notice, libel and defamation, loss of income, loss of status, etc.

Damages for wrongful dismissal include any moneys awarded by a court or a tribunal, or agreed upon in an out-of-court settlement, following a dismissal that the employee claims was wrongful. Wrongful can mean either that the employment was terminated without cause or that the amount of notice was insufficient. Without cause simply means the employee was not at fault, or that dismissal was too harsh under the circumstances.

An employment contract is not always indefinite; either the employer or the employee can terminate it at any time, sometimes without the other's consent. There is not necessarily any wrongdoing when an employment contract is terminated, unless the employment is protected by legislative or contractual provisions. Termination in these cases is wrong if there is no cause. An employee who is not at fault is entitled to reasonable notice of a lay-off or separation. If sufficient notice is not provided, the employee is entitled to remuneration for the notice period (that is, pay in lieu of notice).

An employee who is fired for cause is not entitled to notice or to pay in lieu of notice, although it may be offered. Likewise, pay in lieu of notice is usually not offered when an employee quits. However, if the employee claims that the circumstances forced a resignation, that employee may seek damages. Awards or settlements made in these circumstances are damages for constructive dismissal and are treated in the same manner as damages for wrongful dismissal.

When pay in lieu of notice is offered, the employee may accept or reject the offer. If the offer is accepted, that is usually the end of the matter. The principle of received and accepted is covered in section 5.6.1 of this chapter. If the employee refuses the offer, no allocation is made until a settlement is reached and accepted by the claimant.

Whether or not remuneration is offered, the employee may decide to challenge the dismissal itself, or the terms of the separation offer, if one was made. An employee who is dismissed is protected only to the extent provided for by federal statute, by the labour legislation of the province where the work is performed, or by a union contract. The employee may file a grievance through a union to try to be reinstated, or consult a lawyer and claim damages for wrongful dismissal through the courts.

Whether the case proceeds to court and is settled by a judge, or it is settled out of court, any payment made as a result of that process is generally known as damages for wrongful dismissal. Whether the employee is reinstated or not is only important in determining how the payment will be allocated. The allocation will however, begin with the week of dismissal or termination of employment, regardless of how or when the actual payment is made. The amounts paid to an employee to compensate for lost wages where the employee is not reinstated, do not represent damages and are allocated pursuant to EIR 36(9) and EIR 36(10). Information concerning payments for lost wages paid to an employee who is reinstated after being wrongfully dismissed is included in another section, as they are payments in exchange for the relinquishment of the right to be reinstated (Digest 5.12.12; Digest 5.12.13).

5.12.11.1 The legal process and damages

The initial position of an employee who is claiming damages for wrongful dismissal through the court system, is outlined in a statement of claim. The statement of claim filed with the Court usually lists the categories for which the employee seeks damages. Often, but not always, the amount of compensation sought for each category of damages is listed. In addition to pay in lieu of notice, dismissed employees may request, in a civil suit, compensation for moving costs; costs to become re-employed, including retraining costs; or loss of company benefits, such as dental plans. The statement of claim may also claim damages for intangibles such as mental distress.

After the employee's lawyer sends a statement of claim (the employee's wish list), the parties and their lawyers may meet and negotiate a settlement out-of-court. Out-of-court settlements are common and avoid the risks and trouble of a trial. Once a settlement has been reached out-of-court, letters of understanding, minutes or memorandum of settlement, settlement agreements, or a final release are prepared. Out-of-court settlements are written by lawyers, and not by a judge or arbitrator. The lawyers are free to phrase the terms of the settlement in any manner that benefits their client. The terms of out-of-court settlements may be very specific, or very general. They rarely place blame, nor accept fault on the part of either the employer or the employee, although in some cases they may appear to do so. After both parties have agreed to the terms of the agreement, a final release is usually signed by the employee, along with the settlement agreement, agreeing to the terms of the settlement, and agreeing not to take any future action.

If the parties cannot agree on a settlement, a judge or labour arbitration tribunal hears the case. In the court system, it has long been settled that the principal consideration in assessing damages for wrongful dismissal is the notice period given for the dismissal. In other words, it may not be the dismissal itself that is in dispute, but rather the amount of notice given, or payment in lieu of that notice. This principle was confirmed by the Supreme Court of Canada which ruled that damages for wrongful dismissal should usually be restricted to compensating an employee for damages which are tangible and estimable, for example, wages and other employment-related benefits which are lost when the employment ended (S.C.C Dunsmuir v. New Brunswick, 2008). Damages for wrongful dismissal which are awarded by the courts, are therefore usually confined to putting employees in the financial position they would have been in, had they been given reasonable notice.

In the courts, damages for intangibles such as loss of prestige, injury to reputation and emotional upset are usually awarded only when damage arises from an injury that is not related solely to the dismissal itself. For example, if mental distress is claimed, the civil court or the labour arbitration tribunal must consider if the actions complained of are independently actionable (that is, could the claimant sue the employer for mental distress if a dismissal did not occur). The Court reasoned that stress is normal in any dismissal and should not normally be compensated for in suits for damages for wrongful dismissal.

5.12.11.2 Compensation other than for the loss of income from employment

Damages for wrongful dismissal are presumed to be compensation for the loss of income from employment, and are therefore earnings arising out of employment, unless it can reasonably be concluded that the money does not represent lost wages or lost employment-related benefits. Unless there is clear evidence to the contrary, the Commission may presume that awards do not usually contain monetary compensation for intangibles such as loss of prestige, injury to reputation, or emotional upset, (CUB 65078; FCA A-231-95, CUB 27115).

Any part of an award for damages, which is not related to the direct and tangible advantages received by the claimant during employment, is not earnings. Wages and employment-related benefits such as premiums paid by the employer for insurance-type benefits, can be considered tangible advantages of employment. Therefore, an award to compensate for the loss of those wages or employment-related benefits received during employment, is earnings. An award for an intangible, such as mental distress, is not earnings because compensation for the loss of one's health is not compensation for lost wages, nor is it compensation for loss of an employment-related benefit. An award not related to the advantages of employment is not earnings for benefit purposes (CUB 51759). Payments for medical expenses are never earnings for EI benefit purposes, as they are not meant to compensate the employee for the loss of income from employment. The treatment of expenses, such as legal fees, relocation expenses or retraining expenses, which may form part of an award, is covered in another section (Digest 5.12.2.1; Digest 5.12.11.4).

Frequently claimants will allege that a settlement was not for lost wages, or for other advantages related to employment, but to buy peace and avoid a trial, as a compromise to terminate controversy, for damages for a loss of career, or for a change in status (CUB 57295; CUB 47851). These arguments may be unsuccessful for 2 reasons; First, the name given to a payment does not necessarily define its true nature. Second, the onus is on the claimant to show that an award was not intended to compensate for the loss of wages and other employment-related benefits.

5.12.11.3 The EI process and damages

When a case proceeds to court or labour arbitration, and the text of the judgement allocates the amounts awarded to various categories, the judgement can usually be relied upon as an accurate representation of what the award actually represents (CUB 47918). Such clearly worded judgements should not be questioned, even if all or part of the award compensates the claimant for damages unrelated to the loss of wages or employment-related benefits. Any moneys paid for the loss of wages and employment-related benefits are earnings. It should be noted that a Consent Order is not a decision of the court made after a hearing, but rather it is a ruling confirming agreement reached by the 2 parties.

Often, the text of the court or labour arbitration judgement is not specific and simply awards a lump sum. In these cases, the Commission may assume that the entire award is earnings arising out of employment, and allocate the entire lump sum , less any applicable expenses incurred to obtain it (for example, legal expenses) (EIR 35(10)(a)).

When the matter does not proceed to a court or labour arbitration tribunal, and an out-of-court settlement is reached, the memorandum of settlement and final release may be very general and assign only a final dollar value for the damages sought. When this is the case, the entire amount of the out-of-court settlement, less any applicable legal expenses, is considered earnings arising out of employment and is allocated.

Conversely, the final agreement may contain very specific details. Memorandums of settlement are written by lawyers, whose job is to respond to the needs of their clients. To benefit their clients they may indicate in the documents that all or most of the money paid by the employer is for reasons other than the loss of income from employment. Keeping in mind that the courts usually restrict themselves to awarding damages for tangibles related to benefits received during employment, any out-of-court settlement that claims that very little or no amount is to compensate for lost employment income, must be carefully examined.

It is not enough for a claimant to allege that an out-of-court settlement is not compensation for the loss of wages or other employment-related benefits. Jurisprudence has long held that the onus is on the claimant to show that the money was paid for other reasons, such as unpaid wages, moving expenses, retraining expenses, or for the relinquishment of the right to be reinstated (FCA A-140-03, CUB 56407). Claims or allegations made in a Statement of Claim are not considered proof that the employer has agreed to compensate the claimant for anything other than loss of wages.

To exclude money from the category of earnings paid to compensate for the loss of employment income, the claimant must establish that the payment was requested for other reasons, and that the employer agreed to compensate the claimant for those reasons (for example, injury, damage or expenses). Proof may be included in the final release or in correspondence between lawyers (CUB 78803). In addition, the claimant must show that the injury, damage or expenses claimed actually occurred, and that the payment and the amount were reasonable in light of the injury, damage or expenses. For example, if mental distress is claimed, the Commission may reasonably expect that the claimant sought professional help to deal with the distress. If this were not done, the claimant's allegation would be less credible. Receipts for expenses, which the employer agreed to pay for in the wrongful dismissal suit, are adequate proof that the money was paid to compensate for something other than the loss of employment income and benefits.

The employer must also confirm that the payment was not fully or partly for lost employment income. A straightforward, clear and uncontradicted statement is acceptable unless the employer's confirmation appears to arise out of collusion with the employee, and the intent is to circumvent the EI Act. Likewise, if the employer's statement appears to be motivated by a desire to accommodate the employee, the out-of-court settlement should be examined carefully.

It is rare that any portion of an out-of-court settlement is not considered earnings when it is written in very general terms. This only happens when the evidence clearly demonstrates that the settlement is not solely for lost employment-related income (CUB 51759).

5.12.11.4 Legal costs

The claimant may be awarded an amount of money to reimburse the cost of taking legal action to obtain termination moneys, or to become reinstated. Legal costs or expenses include lawyer's fees, as well as court costs, disbursements and other legitimate expenses directly related to the legal action. As long as the claimant actually incurred expenses in connection with the action taken against the employer, that portion of a payment is not considered earnings for the purposes of EI benefits. This is because the amount paid specifically to reimburse legal expenses is not intended to cover lost wages or employment-related benefits.

Sometimes the amount awarded may not be sufficient to cover actual legal costs, or no special amount is awarded. If the claimant provides proof that the legal costs exceeded the amount awarded for legal costs, or no amount was awarded for the entire amount of the legal costs, those costs are deducted from the settlement. This is because they were incurred for the direct purpose of receiving that income (EIR 35(10)(a); Digest 5.3.3.2). However, if a settlement includes both income replacement and sums not considered earnings for EI purposes, only the amount of the legal fees incurred to recover the income replacement portion of the settlement can be deducted. This amount is obtained by using the percentage that the income replacement portion is, of the total award amount received. This may be adjusted if the claimant can establish that the amount paid to recover the income replacement portion was higher than the calculated proportional amount (CUB 34664).

The claimant cannot include the value of their own time or personal expenses, expended to resolve a wrongful dismissal suit (CUB 72033). Costs related to other legal matters such as pursuing an appeal to the Board of Referees are not valid deductions (CUB 41768).

5.12.12 Finding of discipline and suspensions

When an employee’s actions involve actual or alleged misconduct, the employer has several options to address it, up to and including dismissal. Sometimes the employee may be:

  • fired immediately
  • suspended with pay pending, an investigation, and later fired
  • suspended without pay, and later fired
  • suspended initially with full pay or reduced pay, later without pay, and later fired, or
  • suspended as a disciplinary measure, then return to work

In short, the employer's options are many and varied. The employee also has several options that may include grieving the action, or starting an action for wrongful dismissal. Any earnings paid in relation to the suspension or dismissal would be allocated and could affect a claim for benefits.

Earnings paid or payable by reason of a lay-off or separation must be allocated from the date of the event that gave right to the money. When an employee is suspended or on a leave of absence without pay and is later fired or resigns, the termination of employment is related to the initial suspension or leave of absence (CUB 30296). Any earnings received during the period of suspension or leave of absence, such as vacation pay paid or payable by reason of the suspension or leave of absence, must be allocated from the date of separation in a way that does not exceed the claimant's normal weekly earnings (EIR 36(10)).

In some cases, when an employee has been suspended or fired, the employer and the employee may come to an agreement, or have a decision settled upon them, that the duration of the suspension or the dismissal was too severe a penalty in the circumstances. As a result, the period of suspension may be shortened, or the employee may be reinstated. If the employer then pays the employee an amount to cover lost wages for the period following the amended suspension period, these earnings are allocated to the period immediately following the period during which the claimant was actually suspended and not from the date of the original suspension (EIR 36(11)). Any earnings payable because of a subsequent dismissal are allocated from the date of that subsequent dismissal.

5.12.13 Moneys paid for the relinquishment of reinstatement rights

An employee may file a grievance or complaint relating to a dismissal without just or sufficient cause, a prohibited practice, or for psychological harassment under federal or provincial labour standards laws. Following an award resulting from this grievance, the employee may receive an amount as compensation for relinquishing their right to reinstatement, in compliance with an order by the relevant authority (FCA A-140-03, CUB 56407). A reinstatement can also be ordered within the framework of a complaint filed under other legislations governing human rights, occupational health and safety, victim-related legislations or electoral laws.

In some cases, reinstatement may not be the most appropriate measure and another form of redress should be considered. In such situations, an agreement or settlement may be reached between the parties in which the employer offers to compensate the employee for relinquishing their reinstatement rights.

In order for an employee to be able to receive compensation for relinquishing their right to recall, it is essential that a right to reinstatement exist in the first place, be it under federal, provincial or territorial legislation, or under a contract or collective agreement. It must also be clearly established that the moneys were paid in compensation for the relinquishment of that right.

If the employee does not have the right to ask for reinstatement under legislation or a collective agreement, but pursues wrongful dismissal action through the courts, any amounts granted by the Court constitute damages for wrongful dismissal, and not for the relinquishment of the right to be reinstated (Digest 5.12.11). A court does not have the authority to issue a reinstatement order where there is no right to reinstatement under federal, provincial or territorial legislation, or under a contract or collective agreement.

Moneys paid to an employee pursuant to legislation or a collective agreement, for the relinquishment of reinstatement rights do not constitute earnings for EI benefit purposes. It is not necessary to know whether it was the employee or the employer who initiated the relinquishment of the reinstatement rights.

Unlike moneys paid in compensation for wrongful dismissal, which are paid to cover the period the individual would have worked had they not been dismissed, moneys paid for the express purpose of the relinquishment of reinstatement rights are excluded from earnings. This is because these moneys were not earned by labour or given in return for work done.

To establish that the moneys were paid in exchange for the relinquishment of reinstatement rights, the claimant must provide an explanation and proof that the following 3 criteria were met:

1. The right to reinstatement existed

The right to reinstatement must exist under the federal legislation, under provincial or territorial legislation, or under the clauses of the claimant's work contract or collective agreement.

The right to reinstatement can also include any other employment protection measure, such as separate and negotiable bumping or call‑back rights, which an employer must uphold under a collective agreement.

However, when an agreement between the parties provides for compensation in exchange for the relinquishment of reinstatement rights, it is the very existence of the right to reinstatement, and not the wording of the agreement, that determines whether the moneys can be excluded as earnings. If the right does not exist, the claimant cannot be compensated for relinquishing it.

2. The employee sought reinstatement

The employee must have sought reinstatement either through a grievance or an application submitted under legislation. The grievance filed, the application submitted under legislation, or the correspondence between the parties must indicate that the employee was seeking reinstatement. The wording of a grievance is generally clear about whether the employee was seeking to be reinstated.

The situation is sometimes less clear in cases relating to labour standards legislation. In Quebec for example, complaint forms for recourse against dismissal without good and sufficient cause, prohibited practice, and psychological harassment, do not mention whether the employee requested reinstatement. However, such a request is implicit with the filing of a complaint because the relevant sections of the labour standards legislation seek the employee's reintegration.

3. The moneys were paid to compensate the relinquishment of the right to reinstatement

The fact that the parties have given a label to the damages is not enough; there must be conclusive proof. In all situations where a claimant obtained an agreed settlement, a copy of the agreement between the parties must be provided. This settlement agreement must support the allegation that the right to reinstatement exists, that reinstatement was sought, that the right was relinquished, and that the moneys paid by the employer were compensation for the relinquishment of reinstatement rights. In some cases, additional supporting documents, as well as the correspondence between the parties, could be required to substantiate the allegation.

When the result of a negotiation or mediation process is that an employee relinquishes, rather than claims their reinstatement rights before being reinstated, and the amount paid is based on the relinquishment of that right, the wording of the settlement agreement or of the supporting documents, must support the allegation that:

  • the right to reinstatement exists
  • reintegration was sought
  • that right was relinquished, and
  • the moneys paid by the employer were compensation for the relinquishment of the reinstatement rights

In fact, it must be clearly demonstrated that the moneys were paid in compensation for the relinquishment of reinstatement rights, and that the employer had no choice but to place a monetary value on that right.

Any compensation received as part of an agreement when no right to reinstatement exists will be considered as compensation for loss of wages, and will be allocated in the same way as earnings received upon separation from employment (EIR 35; EIR 36). However, if the claimant proves that part or all of the compensation was paid because of special circumstances, such as the reimbursement of professional or legal fees, relocation costs, retraining or job search costs, or damages for pain and suffering, those amounts will not be allocated (FCA A-567-99, CUB 42598A). If the right to reinstatement does not exist or if the employee has not acquired reinstatement rights, the employee cannot be compensated for relinquishing rights they do not have.

[April 2021]

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