Post-Termination Disability Benefits Reduce Severance Pay

By Hadiya Roderique

Severance obligations can be costly for Canadian employers since most employees are entitled to notice of termination or substantial pay in lieu of notice. A tricky issue is the impact of post-termination income on the obligations of the terminating employer.

Canadian employees are often under the mistaken impression that they have an unconditional entitlement to a large lump-sum severance payment even if they were to quickly start a new job and even if they receive other income during the notice period.

A recent Ontario court decision, Jensen v. Schaeffler Canada, has provided some guidance on the impact of one form of post-termination income – workers’ compensation benefits. This case may have a bearing on how various kinds of post-employment income should be treated in assessing Canadian employees’ entitlements to damages for wrongful dismissal.

Facts
Mary Anne Jensen was a long-term (28-year) employee of Schaeffler Canada.  She had worked as a production worker. At the time of her termination, she was enrolled in Ontario’s Workplace Safety and Insurance Board (WSIB) Labour Market Re-entry Program. This program provides one form of benefits under the statutory workers’ compensation scheme. It provides income replacement benefits when a worker has been injured at work and is being retrained for a different occupation.

Jensen and the company couldn’t agree on her entitlement to notice of termination or pay in lieu of notice. The trial judge concluded that she was entitled to a notice period of 15 months, plus an additional three months to compensate for the difficulty her disability posed for finding new work. So her entitlement totaled 18 months’ pay in lieu of notice.

The lost earnings for the 18-month notice period were less than the funds Jensen had already received from the combination of WSIB benefits and the termination pay and severance pay provided under the minimum standards law, the Employment Standards Act. The employer argued that all such amounts should be offset from the damages award.

Court decision
The trial judge agreed with the employer. The judge followed the reasoning of the Alberta Court of Appeal in a 1985 decision that noted that if the money had come from earnings from a complete stranger, it would be deductible. Thus, as a matter of policy, income ought also to be deducted from the damages award where it’s paid from a fund sustained by the employer, such as the WSIB. This is particularly so where the benefits are in lieu of employment earnings and are to compensate the employee while unable to work because of a workplace injury.  As a result, Jensen was found to have suffered no losses during the notice period.

The court did note that these WSIB payments would not be deducted from the minimum entitlements under the Employment Standards Act, as these entitlements are statutorily guaranteed.

As a result, Jensen received no additional payments from Schaeffler Canada.

Lessons for Canadian employers
This decision provides strong support for an employer’s position that pay in lieu of notice should be reduced by any WSIB loss-of-earning benefits received by an employee during the notice period. This argument also can be extended to other benefits received, such as disability benefits, particularly where the plan has been purchased by the employer.

One must keep in mind, however, that the impact of other income on an employer’s severance obligations is an individual determination to be decided on a case-by-case basis. Much will turn on the nature and the source of the post-termination income.

Please do not hesitate to contact a member of our Labour, Employment and Human Rights Group if you have any questions about a similar situation.

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  Hadiya Roderique
  Hadiya Roderique is an associate in the Labour, Employment and Human Rights Group. She is engaged in a broad practice assisting employers with matters relating to restructuring, downsizing, human rights, employment agreements and terminations, labour relations and collective agreement interpretation.