Pension Claims In Employee Termination Cases

1. Introduction

   In Canada, when an employment relationship is terminated without cause, the employer must provide the terminated employee with reasonable notice or pay in lieu of notice. Employment standards legislation is in place to protect employees by way of minimum notice requirements. Legislation is supplemented by common law to further protect employees with the goal of putting the employee in the position that she would have been if she had worked through the notice period. Employment contracts are also used to provide certainty around the employment relationship, including with respect to obligations and entitlements at the time of termination of employment.

   This paper will look at material employer obligations, specifically with respect to registered pension plans in the province of Ontario, that may arise when terminating an employee. Registered pension plans are highly regulated, complex and can be, from a dollar perspective, a significant part of an employee's compensation. In order to limit liability, an employer needs to fully understand the implications of terminating an employee who is a member of a registered pension plan.

2. Termination Notice Entitlements

   1. Employment Standards Act (Statutory Notice)

      The Ontario Employment Standards Act1 ("ESA") provides minimum standards that employers must follow when terminating employees without cause in Ontario. Employees may have greater rights under common law or contract, but at a minimum, the ESA notice must be provided.

      Section 57 of the ESA sets out the statutory notice period requirements which range from one to eight weeks, based on the terminated employee's years of service. Subject to certain listed exceptions, section 64 of the ESA requires additional "severance pay" of up to 26 weeks in cases of terminations of employees who have 5 or more years of service with the employer and where the employer has a payroll of $2,500,000 or more, or the employer has terminated 50 or more employees in a 6 month period because all or a part of the employer's business has closed.

      Employee benefits must be continued during the statutory notice period. Section 60(1)(c) (working notice) and section 61(1)(b) (pay in lieu of notice) of the ESA require employers to continue benefit accruals and to make all benefit contributions that are necessary to maintain a terminated employee's benefits until the end of the statutory notice period provided for in section 57 of the ESA. If the pension or benefit plan in question requires employee contributions, the employee contributions must also be made in order to attract the required employer contributions.

      Since the terms of many benefit plans require an employment relationship and often "active" employment status, section 62(1) of the ESA deems employees to be actively employed during the statutory notice period. This deeming of active employment status preserves the terminated employees rights to participation in employee benefit plans and also allows an employee to comply with the Income Tax Act (Canada)2 (the "ITA") requirements for continued employment with respect to registered pension plans, as discussed below.

   2. Income Tax Act

      All pension plans must be registered under the ITA in order to be considered tax-exempt. The ITA rules limit the amount of contributions that can be made and service that can be recognized under a registered pension plan which ultimately regulates the amount of benefits that can be tax sheltered and paid from a registered pension plan. Where pension plans are registered under the ITA, the Canada Revenue Agency is responsible for ensuring that the plan is administered in accordance with ITA requirements. One basic but very important ITA rule to remember is the requirement that an employee be employed and be receiving compensation in order to accrue pension benefits. That is, if an employee or former employee's income is considered "employment income" under the ITA and this income continues for the notice period (whether statutory or common law), then accruals and contributions may continue throughout the notice period. What is considered "employment" is a question of fact in each case, however, employment does not have to be active employment. This ITA rule is important, because in the event of an actual termination of employment without proper notice, any damages that relate to pension accruals or pension contributions cannot be paid out of the pension plan but must be paid from employer general revenues, which can be an unexpected and significant budget expense.

   3. Common Law (Reasonable Notice)

      (a) Damages for Pension Loss

      Employers in Canada are also required to provide "common-law" notice which is over and above what is required under...