When the COVID-19 pandemic led to widespread layoffs in Q2 2020, the Canadian government introduced the unprecedented Canada Emergency Recovery Benefit (or “CERB”). CERB was retired in September 2020 and was replaced with (among other things) the EI Emergency Response Benefit (“EI ERB”) and the Canada Recovery Benefit (“CRB”) for those not entitled to the EI ERB. Since introduction, these programs have undergone multiple rounds of revisions, but what has remained consistent is that they provide income support to individuals that are unemployed or under-employed for reasons related to COVID-19. Many employees have also applied for, and received, these benefits after their employment was terminated by their previous employers during the pandemic. A question that has come up several times in recent wrongful dismissal cases is whether CERB or equivalent payments can be deducted from wrongful dismissal damages.
The short answer appears to be: it depends.
Basic principle: employees should not profit from a termination
In a wrongful dismissal action, the employer is alleged to have failed to provide reasonable notice of termination to the employee. If the employee is successful, the court will award compensatory damages to put that employee in the same financial position he/she would have been in if the employer had provided reasonable notice of termination. In short, the goal is to compensate the employee for his/her actual losses from the termination without reasonable notice – not have them come out ahead. That's why we generally deduct mitigation income (i.e. income earned at other new jobs during the notice period) from wrongful dismissal damages.
The “collateral benefit” issue
This basic principle can be harder to put in practice when the employee also receives other “collateral” payments/benefits after the termination. The issue of the deductibility of collateral benefits or side payments from those damages is not new. Before CERB, employers previously raised the issue with regular EI unemployment benefits, and STD/LTD benefits under private insurance plans. And when faced with these questions, courts generally consider whether there is a collateral benefits problem. As stated by the Supreme Court of Canada in IBM Canada Limited v. Waterman, 2013 SCC 70, there is arguably a collateral benefits problem if the employee receives collateral benefits that, if combined with unreduced wrongful dismissal damages, would exceed the employee's actual losses from the termination and either (a) the employee would not have received the collateral benefit “but for” the employer's failure to provide reasonable notice; or (b) the collateral benefit is intended to be an indemnity for the sort of loss that results from the employer's failure to provide reasonable notice. Courts have established a clear exemption to the collateral benefits problem for private insurance policies paid for by the employee.
Using this framework, the deductibility of regular EI benefits from wrongful dismissal damages is settled law: they are not deductible based on the private insurance exemption. Employees pay into EI and are obligated to report employment income, including wrongful dismissal damages, to Service Canada, which could result in a repayment obligation to EI after a wrongful dismissal settlement or award.
Understandably, the case law on the deductibility of STD/LTD insurance benefits from wrongful dismissal damages is highly dependent on the facts, including whether the employee paid his/her own premiums, whether the insurer is the employer itself or a third party insurer, the terms of the insurance plan, etc.
CERB/CRB: arguably not deductible from wrongful dismissal damages, but inconclusive case law
For CERB and CRB payments, employees are generally obligated to report the receipt of wages, which would generally include wrongful dismissal damages or a wrongful dismissal settlement, attributable to a period during which they received CERB/CRB benefits to Service Canada. Those wages then influence the employee's entitlement to the CERB/CRB for that period. This could result in the employee being obligated to repay some or all of the CERB/CRB benefits received during that period. As such, there may not be a collateral benefits problem for CERB/CRB benefits.
However, the case law has not entirely settled the question.
In Iriotakis v. Peninsula Employment Services Limited, 2021 ONSC 998, the court declined to deduct CERB benefits received by the terminated employee from his wrongful dismissal damages. The court unfortunately did not consider whether there was a collateral benefits problem, but instead concluded that it would not be fair to deduct the CERB benefits from the employee's damages in the circumstances. Those circumstances included the fact that the employee's compensation package was heavily reliant on commissions, which the employee was not entitled to as part of his wrongful dismissal damages (because of restrictions in the commission plan). As such, given that his wrongful dismissal damages only included his base salary (which was not reflective of his total compensation), it would not have been fair to further reduce his award by the CERB payments.
In the British Columbia decision of Hogan v 1187938 B.C. Ltd., 2021 BCSC 1021, the court did deduct CERB payments received by the employee from wrongful dismissal damages. However, the precedential value of the decision is unclear because it appears that there was little (if any) evidence presented to the court about CERB and the extent of its repayment obligations. In fact, the court expressly stated that there was no evidence that the employee would need to repay the CERB payments after receiving wrongful dismissal damages. As such, the court was concerned about a collateral benefits problem and deducted the CERB payments received by the employee during the reasonable notice period.
In Slater v. Halifax Herald Limited, 2021 NSSC 210, the Nova Scotia superior court considered both Iriotakis and Hogan and again took a different approach. It concluded, based on the evidence presented, that the employee likely would need to repay some portion of the CERB payments he received during the notice period (note: the decision was issued before the end of the notice period). It held that as such, there should be no deduction for the CERB payments to the employee's wrongful dismissal damages. However, the court did reduce the 24-month notice period to 22 months to reflect the possibilities that (a) the employee would find suitable alternate employment during the notice period; and (b) the employee was ultimately not required to repay the CERB benefits.
So, 3 different cases and 3 different approaches. Clear as mud! That said, we expect this situation to clear up as more evidence becomes available about whether employees are actually going to be required to repay CERB benefits attributable to a period for which the employee was given termination pay.
EI ERB: arguably deductible from wrongful dismissal damages, if in the right timeframe
There is one scenario that appears to cause a collateral benefits problem: an employee receives damages for wrongful dismissal (either via a settlement or trial award) attributable to a notice period between September 27, 2020 and September 25, 2021 and the employee receives EI ERB benefits for some or all of that same period.
This is because of important temporary provisions of the Employment Insurance Act that exclude such damages from the definition of earnings during the period beginning September 27, 2020 and ending September 25, 2021. In other words, it is unlikely that employees that received those EI ERB benefits will be liable to repay the benefits even if they receive wrongful dismissal damages attributable to that period. Employers and employment lawyers should accordingly do their due diligence on this issue in settlement discussions and in wrongful dismissal lawsuits.
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.