After an employee has been terminated from their employment, there are a variety of benefits they may be eligible to receive, depending upon their circumstances. Benefits that an employee receives during the reasonable notice period need to be taken into consideration by an employer (and employee) when assessing liability for wrongful dismissal. In some circumstances, those benefits can be deducted from the wrongful dismissal damages, thus reducing an employer's potential liability. However, not all benefits are treated in the same manner.

An employee terminated without cause and without reasonable notice of termination, or pay in lieu thereof, has a common law right to seek damages by bringing an action for wrongful dismissal. The amount of damages a wrongfully dismissed employee is entitled to is calculated based on the income they would have earned during the reasonable notice period, less any mitigation income earned during that period. An employer may be entitled to further deductions to their liability in damages based on benefits received by an employee during the notice period.

Generally, income replacement benefits are deducted when the receipt of both the wrongful dismissal damages, and the benefit received during the notice period, would result in the employee receiving more compensation than they would have earned during the notice period. Below is a summary of the deductibility of common collateral benefits:

  • Employment Insurance Benefits:  Employment insurance benefits are not deductible. The Employment Insurance Act expressly provides that those benefits that were provided during the reasonable notice period are to be repaid upon receipt of damages for wrongful dismissal.
  • Pension Benefits:  Pension benefits are not deductible. The courts classify these benefits as a form of deferred compensation rather than a wage replacement benefit. There is, however, an exception to this general rule that applies when the employer makes gratuitous payments to enhance the pension benefits as part of the severance package. The enhancement can be deducted from the wrongful dismissal damages.
  • Short Term and/or Long Term Disability Payments: The deductibility of these benefits is contingent on the unique circumstances surrounding each case. If the benefit premium is paid for by the employee, there is a higher chance that the benefits received during a reasonable notice period will not be deductible. If the benefit premium is paid for by the employer, the benefits received during a reasonable notice period are generally deductible. Courts have frequently held that disability payments are a wage replacement benefit and, as such, are benefits that are meant to compensate an employee for the loss of their regular salary. Wrongful dismissal damages and wage replacement benefits overlap as each provide compensation for the same loss – the loss of the employee's regular salary.
  • Workers' Compensation Payments:  For reasons similar to those discussed relating to STD and LTD benefits, workers' compensation payments are deductible as they are a wage replacement benefit meant to provide compensation for the loss of the employee's regular salary.
  • CPP Disability Benefits – CPP disability benefits are not deductible.

CERB as a Collateral Benefit

When the Government of Canada introduced the Canada Emergency Response Benefit (“CERB”) to combat the economic fallout of the COVID-19 pandemic, eligible employees who had been laid off, or dismissed, from their employment could access this collateral benefit. Recently the British Columbia Supreme Court in the case of Hogan v 1197938 BC Ltd, 2021 BCSC 1021, has clarified the deductibility of CERB payments from wrongful dismissal damages.

In Hogan  an employee terminated without reasonable notice, or pay in lieu thereof, brought an action against their employer seeking damages for wrongful dismissal. The action proceeded by way of summary trial, the only issue being the length of the reasonable notice period and the corresponding damages that were owed to the employee. The employer argued that the $14,000 in CERB payments that the dismissed employee had collected during the notice period should be deducted from damages.

The Court agreed with the employer and held that the CERB payments should be deducted. The Court explained that, unlike EI payments, there was no legislation in relation to the CERB that required the repayment of CERB in the event that an employee receives damages for wrongful dismissal for the period in which they received CERB payments. If the CERB payments were not deducted the employee would receive more than they would have earned had their employment not been terminated, as they would receive CERB payments and wrongful dismissal damages for the same period of time. The Court noted that CERB payments were not a form of delayed compensation but rather were a wage replacement benefit and, as such, ought to be deducted from the wrongful dismissal damages.

What This Means for Employers

The deductibility of collateral benefits affects an employer's wrongful dismissal liability. While the law with respect to the majority of collateral benefits is mostly settled, the introduction of the CERB as a new collateral benefit created some uncertainty for employers and employees alike. The decision in Hogan  is good news for employers who now may have their wrongful dismissal liability reduced by the amount a dismissed employee receives in CERB payments during the reasonable notice period.

Co-authored by Dawson Harrison, an Articled Clerk in Cox & Palmer's Fredericton office.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.