The pension piece of a severance package should be paid out of the pension plan if possible. Techniques to achieve this can be good for employers and employees.
- Damages for wrongful dismissal include the value of what the terminated employee would have earned ("accrued") if he had remained in employment for the common law notice period.
- Many employers provide pension accrual only for the statutory notice period. Terminated employees should demand the value of accrual for the entire common law notice period, even if that accrual is not permitted under pension law due to the fact the individual is no longer an employee.
- Severance packages can be structured to allow a terminating employee to continue to accrue pension benefits for the entire period of common‐law notice. The basic rule is that the individual must be an employee under the Income Tax Act for accruals to be permitted under pension law. Pension accruals are permitted during a salary continuance period, where some other benefits continue. The employee doesn't have to be actively at work, but his earnings must be T4 insurable earnings.
- The fatal point is usually the issuance of an ROE, or payment of a retiring allowance lump sum – once that happens, accruals under a pension plan usually must cease, according to pension and tax legislation. But damages for pension accrual are still payable under the common law of wrongful dismissal.
- If a cash payment is made to a terminating employee in lieu of pension benefits he would have earned during a notice period, it should be grossed up to take account of the fact it's immediately taxable. Surprisingly, many plaintiff lawyers don't demand this.
Severance packages for many terminating employees are about to get a lot more expensive. Find out if the terminating employee is in a defined benefit pension plan that has early retirement enhancement provisions. Their pension entitlement could double in value, under *new* Ontario pension legislation.
- Effective July 1, 2012, the Ontario Pension Benefits Act will require employers to pay higher pension benefits to certain terminating members of pension plans. This expensive benefit is called "grow in". It used to apply only upon plant closures (plan wind‐ups). In some cases it can double the value of the pension benefit.
The enhanced ("grow in") benefit applies only to:
- Ontario terminated employees
- defined benefit pension plans that have "early retirement enhancements": plans that say that the employees who meet certain age/service criteria get an enhanced early retirement pension
The enhanced ("grow in") benefit does not apply to:
- employees terminated for wilful misconduct, disobedience or wilful neglect of duty by the member that is not trivial and has not been condoned by the employer
- employees who resign
Questions you should ask:
- is the employee in a defined benefit pension plan?
- does the pension plan have enhanced early retirement provisions?
- what is the value of the "grow in" benefit?
- is there value in negotiating a deal where the employee voluntarily resigns, so as to avoid the "grow in" benefit that would otherwise be payable from the pension plan?
- does the common law notice period extend over July 1, 2012?
- Any employee who is considering resigning should be informed of this new "grow in" benefit.
- Employers who provide pension plans have a fiduciary duty to disclose relevant information to all employees – so the issues surrounding the right to this "grow in" benefit on all terminations of employment should be disclosed to employees and their counsel.
- The application of the new requirement regarding "grow in" can be avoided by employers if they amend their pension plan texts to remove the early retirement enhancement provisions. The amendments have to be done properly.
What should you know about the "Indalex" Ontario Court of Appeal case?
- It pulled the rug out from lenders and insolvency practitioners. It says that the entire amount of a pension deficit can rank ahead of all other creditors, including secured creditors, depending on the factual circumstances.
- The result is that when an employer seeks protection under insolvency legislation such as the CCAA (Companies' Creditors Arrangement Act) or BIA (Bankruptcy and Insolvency Act), employees and unions will be given earlier notice of the proceedings, and invited to the table where deals are done on restructurings of the employer. " It makes painfully clear the fact that directors and officers of a company that sponsors a pension plan must considered the interests of the pension plan members at all times. It's no excuse to say that they had to look after the interests of shareholders, customers or lenders. Directors and officers have to be able to demonstrate that they acted reasonably, in the best interests of the plan members, to attempt to protect the pension benefits. If they don't, they could be personally liable for pension deficits.
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