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 the 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 payFootnote 1 or retirement paymentsFootnote 2, for the loss of that employment. Other moneys such as vacation payFootnote 3; statutory holiday payFootnote 4; commissionsFootnote 5; accumulated sick leave creditsFootnote 6; and bonusesFootnote 7 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, an employee may take action through the union, a labour arbitration process or through the CourtsFootnote 8.
It is reasonable to conclude that moneys paid or payable on the occasion 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 establishes 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 separationFootnote 9. Similarly, if it is established that earnings which were 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.
[ April 2006 ]
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 occurs during a period of lay-off. In these cases the date of separation does not equate with the last day of work. When this occurs and termination moneys are paid or payable, it is essential to determine which event gave right to the moneys, the lay-off or the separation. When termination moneys are paid for the later separation and not the lay-off, the allocation of earnings commences from the date of the later separationFootnote 10.
- Lay-off normally refers to a temporary cessation of work or to a period of inactivity or idleness, that is, a shortage of work, a suspension 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 a substantial period of time. The key is whether the employer considers the person an employee with certain rights or obligations during the period of lay-off.
- A separation refers to the final and complete severance of the employer-employee relationship. Usually it is occasioned by 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,Footnote 11 or it may be the result of an event unrelated to the original cessation of work, such as a later decision to close the plant.
- Termination or termination moneys or termination earnings are used in reference to either a lay-off or a separation. The word refers to a cessation of work and any moneys paid in relation to that cessation.
5.12.2 Lay-off or separation moneys: income arising out of employment
The nature of moneys paid or payable on 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 arise out of the employment relationship with the employer and they are income arising out of employment.
Moneys paid by an employer, or any other person, at the time of, or by reason of, a termination of employment, is 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 and 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,Footnote 12 or money paid to compensate for losses unrelated to advantages arising from employment is not incomeFootnote 13.
A payout of equity in a business (that is, a return of the amount the claimant invested in a business) is not related to employment, even if the claimant was employed by that businessFootnote 14. If a payment does not arise out of employment, it is not earningsFootnote 15.
Relying solely on the terms used by the parties is sometimes insufficient. When doubt exists about the true natureFootnote 16 of separation payments, the intentions of the parties must be examined by reviewing all relevant documents and contacting all the parties involved. Ultimately, the onus is on the claimant to provide adequate facts to show that any income received upon the termination of employment is not earningsFootnote 17.
[ April 2006 ]
188.8.131.52 Expenses, costs, and allowances paid or payable by reason of a lay-off or separation
When employment ceases, an employer may make payments in addition to pay in lieu of notice or severance payFootnote 18. These additional payments may be called expenses, costs or allowances, for example, moving expenses, moving costs, or moving allowances. Although claimants and employers may use the terms allowances, expenses and costs 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 employmentFootnote 19. Nevertheless, 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, or tuition and text book costs associated with retraining, as well as 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 separationFootnote 20.
The claimant cannot claim an expense for which money was not provided by the employer expressly for that purpose. 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 the termination moneys, such as legal fees, court costs and other legitimate expenses directly related to the legal actionFootnote 21.
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 receipts are not required.
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 actually occurred 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 claimant is able to save by reducing the expense or cost, 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 pocket the difference. As long as the employer based the payment on a reasonable estimate of the expense or cost, the difference is not considered to be 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 a benefit has accrued 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 allocatedFootnote 22.
There may be situations where payments are made for job search and job training expenses or costs which have not yet been incurred because the claimant did not have the funds 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 as earnings paid or payable by reason of the lay-off or separationFootnote 23.
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 would be 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 earningsFootnote 24.
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 which 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 and vacation pay.
[ June 2003 ]
5.12.3 Termination moneys used to purchase RRSPs or pension credits and to enhance pensions
Employees may choose to have termination earnings, such as 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 RRSPFootnote 25. Whether the claimant accepts a cheque and deposits it into a savings account; accepts a cheque and purchases a RRSP; or has the employer purchase the RRSP, the result is the same for EI purposesFootnote 26. The termination earnings are considered paid or payableFootnote 27 by reason of the lay-off or separation and are allocated from the date of whichever event gave right to the moneyFootnote 28. 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 factors are the reason for the payments and the fact it was paid or payable, not the use to which the employee chooses to put it.
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 entitlementFootnote 29. The choice to use one benefit (severance pay), to improve another (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 commences from the week of the lay-off or separation, whichever event was the reason for the paymentFootnote 30. 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 employmentFootnote 31.
If the earnings are paid by reason of a lay-off or separation, that fact remains unalterable regardless of the method or time 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 concurrently with earnings from other employments, and consecutively with earnings from that employmentFootnote 32.
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 allocatedFootnote 33. These earnings would be 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 earningsFootnote 34. Then the revised total is allocated from the date of the lay-off or separationFootnote 35.
The claimant's choice of the method or time of payment, or a delay by the employer in issuing payment, or a payment of separation moneys prior to the termination of employment does not affect the period for which the earnings are allocated. Any allocation of earnings commences from the date of the lay-off or separation. In other words, the method or timing of payment only affects when the Commission allocates the money, not the period for which it is allocated. For example, if an employee chooses to receive quarterly payments for three years, the earnings cannot be allocated until each payment is made, because the earnings are not payable until each quarterly period arrivesFootnote 36. Regardless of the number of payments made, there is still only one event, either a lay-off or a separation, not a series of separations that caused the earnings to be paidFootnote 37. Each subsequent payment is added to the termination money that has already been allocated. On the other hand, if the payment is only delayed because of administrative reasons, such as the timing of payroll runs, the earnings are still payable and would be allocated immediately, even if the actual payment has not yet been madeFootnote 38.
[ June 2003 ]
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 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 period of time set by that province's legislation, wages or pay in lieu of notice, need not 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, 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 monies 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 complete severance. In some provincial employment legislation, the date of termination is deemed to be the date of the initial temporary lay-off, if the period of lay-off exceeds that of a temporary lay-off. In those cases, the earnings will be allocated from the initial lay-off.
If the employer issues wages in lieu of notice during a period of temporary lay-off and the lay-off remains temporary, meaning that no termination has occurred, the payment is allocated from the day 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 to comply with provincial legislative requirements is a legislated form of recognition for service and the amount is also 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 is applicable, 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 has passed, the provincial legislation states that a separation occurs at that time, and requires the payment of severance payFootnote 39. In this scenario, both a lay-off and a separation have occurred at different times. Severance pay is payable by reason of the separation, which occurred only after a certain period of time passed, and not by reason of the 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 moneyFootnote 40.
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 moneyFootnote 41.
Where a valid Order is issued by a Court of competent jurisdiction, be it by consent or decree, which orders the division of a matrimonial asset, such as severance pay, this division is accepted and only the portion of the severance pay which is the property of the claimant is allocatedFootnote 42.
184.108.40.206 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 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, the employee does not become entitled to severance pay until the recall rights are surrendered or expire, and a separation from employment occursFootnote 43. 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 to relinquishing recall rightsFootnote 44. 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 departmentFootnote 45. If the severance pay is only payable when a separation occurs which might happen only when the recall rights are surrendered or expire by the passage of time then the severance pay, even if paid in trust to a provincial labour department, was not paid nor payable to the claimant. 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 may have to be examined.
In order to allocate severance pay commencing with the week that recall rights are surrendered or expire, there must be some possibility of recall with that employer. If the possibility of recall does not actually exist, allocation of the severance pay will commence with the week that the lay-off occurred.
There may be cases in which recall rights are alleged to be 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 a possibility of recall, however slight, severance pay may be found to be payable by reason of the surrender or expiry of the recall rights and not the lay-off. The possibility of recall can be with the employer at the same location if the employer continues to operate the business at a reduced level; at some other business location of the employer; with a successor employerFootnote 46; or receiver. When a business ceases operations entirely and there is no arrangement with the successor employer maintaining recall rights or an employer is bankrupt, recall rights do not exist and the permanent separation is considered to occur when the employer ceases operations or the bankruptcyFootnote 47 occurs. However, in cases where no actual recall rights are found, allocation should not take place until the severance pay is "payable" at the end of the recall period unless the claimant agrees to allocationFootnote 48.
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 by the passage of time, 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. Once that choice, if available, is made, each time that the payments are made, the allocation commences from the date of the lay-off or separation, whichever event gave right to the payment.
[ June 2007 ]
5.12.7 Retirement payments
Retirement paymentsFootnote 49 are generally a form of severance pay. Retirement payments may be in lieu of severance payFootnote 50, or in addition to severance payFootnote 51, or an enhancement of severance pay. The term retirement does not necessarily mean the employee is retiring from the workforce–only from a specific employment. The payment may be paid in a lump sum, or paid periodically. 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 pensionsFootnote 52.
The amount of the retirement payment may be based on years of service or based on a formula related to the number of months left before the employee reaches early or normal retirement age. The employer may be discharging a contractual obligation to a departing employee, offering a gratuitous payment in consideration of the circumstances, or offer an early retirement incentive outside the usual terms of the employment contract.
Both lump-sum and 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, the salary continuance earnings are allocated to the period for which they are payableFootnote 53. 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 benefitFootnote 54. 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 earningsFootnote 55.
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 to be a type of retirement benefitFootnote 56. Such payments, whether they are allowed under the terms of the pension plan or as a gratuitous payment by the employer, are earnings as they arise out of employment. Since they were paid by reason of a lay-off or separation, they would be allocated in the same fashion as any other termination paymentFootnote 57. A return of the employee's own pension contributionsFootnote 58 has no current consequences, as these moneys are part of the claimant's gross earningsFootnote 59 during the period of employmentFootnote 60.
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. These moneys are not paid to compensate for incapacityFootnote 61. Compensation for unused sick leave credits or payments based on some type of sick leave formula may be given different names by employers and employeesFootnote 62. Regardless of the name given to the money, it is income arising out of employment, which is earnings that must be allocatedFootnote 63.
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 moneyFootnote 64. However, if the reason for the payment of the accumulated sick leave credits is because the employment contract requires an anniversary date payment, then the earnings are only allocated to the week of the transactionFootnote 65, which is the week of the anniversary date.
5.12.9 Wage protection plans
Some provinces have established labour legislation to compensate employees who have lost their employment due to the employer's bankruptcy or other types of insolvency. These provincial programs usually compensate an employee only to a maximum amount, but may include payment for loss of wages, unpaid vacation pay, severance pay and wages in lieu of notice. The provincial government or labour department that administers the program, meets the criteria of any other person as defined by the EI legislationFootnote 66 and a provincial Wage Earner Protection payment is income arising out of employmentFootnote 67.
Payments made to compensate for unpaid wages are allocated to the period in which the work was performedFootnote 68. Other 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 allocated from the date of the event that gave right to the moneyFootnote 69. The event that gives rise to the payment is the separation from the employerFootnote 70 and not the settlement of the bankruptcy or when subsequent employment with the trustee endsFootnote 71.
5.12.10 Fringe benefits
The value of some non-pecuniary fringe benefitsFootnote 72 is not allocated when these fringe benefits are enjoyed during periods of employmentFootnote 73. The value of these fringe benefits is still not allocated, even if the employer continues to provide these same non-pecuniary fringe benefits beyond the termination of employment. This may occur when the employer continues health or dental insurance coverage or allows the free use of a company product, such as, free air travel for airline employees 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 the insurance-type non-pecuniary fringe benefit, these moneys must be allocatedFootnote 74 because the fringe benefit is no longer non-pecuniary and is a benefit or advantage arising out of employment. This remains so, even if the claimant uses the money to purchase the insurance coverage the money was given to buy.
When the termination moneys include a payment in lieu of a non-pecuniary fringe benefit, normal weekly earnings include 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; 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 then include both the basic salary and the value of the weekly non-pecuniary fringe benefits.
The value of the fringe benefits is included in the normal weekly earnings only if the calculation of the termination settlement is based on the basic salary plus the value of the 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 any 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 that are 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 does not have an indefinite existence. It may be terminated by either the employer or the employee at any time, without the other's consent, and no wrong is done by the termination itself unless the employment is protected by legislative or contractual provisions. Termination in these cases is in itself wrong if there is no just cause. An employee who is not at fault is entitled to reasonable notice of the lay-off or separation. If due 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 still 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 another sectionFootnote 75. If the employee refuses the offer, no allocation is made until the settlement is reached and accepted by the claimant.
Whether remuneration is or is not offered, the employee may decide to challenge the dismissal itself, or the terms of the separation offer, if one was made. A dismissed employee 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 become 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 the case is settled out of court, any payment made by that process is generally known as damages for wrongful dismissal. Whether the employee is reinstated or not is important only in determining distribution of payment, which begins with the week of dismissal or termination of employment regardless of the methods or date of paymentFootnote 76. The amounts paid to an employee to compensate for wage loss do not represent damagesFootnote 77. The question of payments for wage loss paid to a employee reinstated after being wrongfully dismissed is addressed in another sectionFootnote 78, as are payments in exchange for the relinquishment of the right to be reinstatedFootnote 79.
[ April 2006 ]
220.127.116.11 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, that is, money sought for each category of damages, is listed. In addition to pay in lieu of notice, dismissed employees may request, in their civil suit, compensation for moving costs; costs to become re-employed, including retraining costs; and 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, which is the employee's "wish" list, the parties and their lawyers are free to meet and negotiate a settlement out-of-court. Out-of-court settlements are common and avoid the risks and trouble of a trial. A successful out-of-court settlement is followed by letters of understanding, minutes or memorandum of settlement, or settlement agreements, plus a final release. Out-of-court settlements are written by the lawyers, 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 lay blame, nor accept fault on the part of either the employer or the employee, although they may be phrased in such a way as to 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 and agreeing not to take any future action.
If the parties cannot agree on a settlement, the case would be heard by a judge or a labour arbitration tribunal. 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, what was wrong with the dismissal, was the amount of notice or payment given in lieu of 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 endedFootnote 80. 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 which 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 dismissalFootnote 81.
18.104.22.168 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 benefitsFootnote 82. The Commission may presume that awards do not usually contain monetary compensation for intangibles, such as, loss of prestige, injury to reputation and emotional upset, unless there is clear evidence to the contraryFootnote 83.
Any part of an award for damages, which is not related to the direct and tangible advantages enjoyed 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 enjoyed 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 benefitFootnote 84. An award not related to the advantages of employment is not earnings for benefit purposesFootnote 85. The treatment of expenses, such as, legal, relocation and retraining expenses, which may form part of an award, is covered in another sectionFootnote 86.
Frequently claimants will allege that a settlement was not for lost wages, or for other advantages related to employmentFootnote 87 but to buy peace and avoid a trialFootnote 88; or as a compromise to terminate controversyFootnote 89; or for damages for a loss of careerFootnote 90 or a change in statusFootnote 91. These arguments were unsuccessful for two reasons. First, the name given to a payment does not necessarily define its true nature. Second, the claimants were unable to show that the award was not intended to compensate for the loss of wages and other employment-related benefits enjoyed during employmentFootnote 92.
22.214.171.124 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 to contain an accurate representation of what the award actually representsFootnote 93. 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 two parties.
When the text of the court or labour arbitration judgement is not specific and simply awards a lump sum, the Commission may assume that the entire award is earnings arising out of employment and the entire lump sum awarded by the court or tribunal, less any applicable expenses expended to obtain the award,Footnote 94 such as, legal expenses, is allocated.
When the matter does not proceed to a court or labour arbitration tribunal, and an out-of-court settlement is concluded, the memorandum of settlement and final release may be very general and assign only a final total dollar value for the damages sought. When the memorandum of settlement or final release is worded in general terms, the entire amount of the out-of-court settlement, less any applicable legal expenses, is considered earnings arising out of employment and allocated.
The final agreement may also be very specific. Memorandums of settlement are written by lawyers. It is their job 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 not for lost income from employment. Keeping in mind that the courts usually restrict themselves to awarding damages for tangibles related to benefits enjoyed during employment, any out-of-court settlement which claims to have little or no concern with lost employment income must be carefully examined.
If the claimant claims that an out-of-court settlement is not for compensation for the loss of wages or other employment-related benefits, the jurisprudence requires that the claimant must show that either the money was paid for some other reason, such as, unpaid wages, moving expenses or retraining expenses or for the relinquishment of the right to be reinstatedFootnote 95. This means that the onus is on the claimant to prove that the settlement, or any portion of it, was not paid for lost income from employment. Claims and allegations made in a Statement of Claim are never 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 the injury, damage or expense. Proof may be found in the final release or in the correspondence between lawyersFootnote 96. In addition, the claimant must show that the injury, damage or expense claimed actually occurred and that the payment and the amount were reasonable in light of the injury, damage or expense. 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 in the wrongful dismissal suit to pay for, are adequate proof that the money was not paid to compensate for the loss of employment income and benefits.
The employer must also confirm that the payment was for something other than for lost employment income. A straightforward, clear and uncontradicted statement is only questioned if the employer's confirmation appears to arise out of collusion with the employee, and the intent is to circumvent the purpose of 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 would be questionable.
Only rarely is any portion of a generally worded out-of-court settlement not considered earnings. These very rare cases happen only when the evidence clearly demonstrates that the settlement is not for lost employment-related incomeFootnote 97.
[ April 2006 ]
126.96.36.199 Legal costs
The claimant may be awarded or given an amount of money to reimburse the cost of taking legal action in order 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 had expenses in connection with taking the action against his or her employer, that portion of a payment is not be considered earnings. Money paid by the employer specifically to reimburse legal expenses is not income because it is not intended to pay for lost wages or lost employment-related benefits.
Sometimes the amount awarded may not be sufficient to cover actual legal costs, or no special amount is awarded. The amount of the legal costs, which exceeds an actual award for legal costs, or the entire amount of the legal costs where none was awarded, is deducted from the settlement. These types of expenses or costs are deducted from income because they were incurred for the direct purpose of earning that incomeFootnote 98. However, if a sum of money is recovered which includes both income replacement and other sums which are not considered earnings due to their nature, the total amount of legal fees paid may not be deducted. Only the amount of the legal fees paid to recover the income replacement portion can be deducted as the legal costs. This amount is obtained 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 amountFootnote 99.
The claimant cannot include the value of their own time or personal expenses, expended to resolve a suit for wrongful dismissalFootnote 100. Costs related to other legal matters such as pursuing an appeal to the Board of Referees are not valid deductionsFootnote 101.
5.12.12 Finding of discipline and suspensions
When misconduct is involved or alleged the employer has several options 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 and later without pay and later fired; or suspended as a disciplinary measure before returning 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 commencing an action for wrongful dismissal. Any earnings paid in relation to the suspension or dismissal might affect a claim for benefit and would have to be allocated.
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 without pay and later fired, the termination of employment is related to the suspensionFootnote 102. If the claimant receives any other earnings during the period of suspension such as vacation pay, any earnings considered paid or payable by reason of the suspension, which in this case is equated with a lay-off, must be allocated so that the earnings do not exceed the claimant's normal weekly earningsFootnote 103.
In some cases, when an employee has been suspended or fired, the employer and the employee 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 and 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 that subsequent or amended suspension period, rather than from the date of the original suspensionFootnote 104. Any earnings payable because of any subsequent dismissal is allocated from the date of that subsequent dismissal.
5.12.13 Moneys paid for the relinquishment of reinstatement rights
Following an award resulting from a grievance or complaint relating to a dismissal without just and sufficient cause, a prohibited practice or in case of psychological harassment under federal or provincial law on labour standards, an employee can obtain an amount as a compensation for relinquishing the right to reinstatement in compliance with an order by the competent authorityFootnote 105. 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 and 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 his or her reinstatement rights.
It is essential that a right to reinstatement exist under the federal legislation, under provincial or territorial legislation, or under a contract or collective agreement, and it must be clearly established that the monies 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 CourtFootnote 106 constitute damages for wrongful dismissal. 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.
Monies paid to an employee for the relinquishment of reinstatement rights conferred under legislation or a collective agreement, do not constitute earnings. It is not necessary to know whether it was the employee or the employer who initiated the relinquishment of reinstatement rights.
Contrary to monies paid in compensation for wrongful dismissal, which are paid to cover the period that the individual would have worked had he or she not been dismissed, monies paid for the express purpose of the relinquishment of reinstatement rights are excluded from earnings because these monies cannot be said to have been "earned by labour" or "given in return for work done".
Therefore, when a claimant submits proof, documentation or a valid agreement showing that the monies received were paid for the sole purpose of compensating the individual for the relinquishment of reinstatement rights, it must first be determined whether the right to reinstatement actually existed.
To establish that the monies were paid in exchange for the relinquishment of reinstatement rights, the claimant must provide an explanation and proof that the following three 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 monies can be excluded from consideration 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 monies 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 that right was relinquished, and that the monies 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, his or her 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, that reintegration was sought, that that right was relinquished, and that the monies paid by the employer were compensation for the relinquishment of reinstatement rights. In fact, it must be clearly demonstrated that the monies 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 pursuant to sections 35 and 36 of the Regulations, except where 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, or retraining or job search costs, or damages for pain and sufferingFootnote 107. 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 he or she does not have.
[ November 2011 ]
[ April 2006 ]
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