An employee may participate in an employer’s pension plan as part of his/her job compensation package. This often makes up a significant term of the employee’s remuneration package, and becomes more valuable the longer the employee has been able to participate (and contribute) in the pension plan.
There are generally two types of employee pension plans: Defined Benefit Pension Plan (less common) and Defined Contribution Pension Plan (more common).
In a termination of employment, where an employee is asked to consider a severance package, a key issue is understanding the impact of a termination of their employment on the employee’s pension plan.
This issue is usually resolved based on which type of pension plan the employee participates in; whether their employment is terminated without cause (which will entitle them to a severance package); and whether they will be paid severance compensation as a lump sum (cash payment) or salary continuation over the reasonable notice period.
Defined Benefit Pension Plans and Severance Packages
In this type of pension plan, the contributions of both the employee and employer are invested in a pension fund and used to pay the member’s lifetime pensions. With a Defined Benefits (DB) Pension Plan, employees can estimate in advance what their pension will be upon retirement, as their pension benefits are pre-defined and amounts are fixed.
A DB Pension Plan is the typical preference for unions and, indeed, most employees, since they provide a predictable amount of pension at little or no risk to the individual. In fact, as of 2019, approximately 80 per cent of Canadian public sector workers participate in a DB Pension Plan, compared to roughly 10 per cent of private sector workers.
For Cause Termination vs. Without Cause Termination
When an employee’s job is terminated, they are usually owed a severance package – unless the termination was a result of serious misconduct that justified a dismissal. Where a severance package does not provide employee’s minimal entitlements under the Employment Standards Act, 2000 (“ESA“), an employee may have the option to challenge the termination with a wrongful dismissal claim against the employer.
If an employee is terminated with cause, it means their job ends immediately – and they will not receive any prior notice of termination, or pay in lieu of notice (i.e., no severance package). To justify this decision, an employer must prove the employee’s misconduct breaks the trust expected in the employee, and that it could no longer maintain confidence to continue the employment relationship. Examples of such misconduct include dishonesty, theft or fraud, workplace harassment and incompetence or poor performance (incompetence).
In the case of a termination with cause, the employee will therefore not be entitled to receive any damages (payments) for their pension plan. As such, if have been dismissed for cause, it is critical that you consult with an experienced employment lawyer as soon as possible to review your individual employment termination and severance rights.
If an employee is terminated without cause, they may seek common law “notice period” (severance pay), which is often more than the minimal entitlements under the ESA. Severance pay is basically a court’s estimate of the amount of time it would take an employee to find a similar job, considering factors such as the employee’s age, skill level, salary, an employees position and responsibilities, economic conditions, and more.
As part of the employee’s severance pay, they will be entitled to receive their regular salary, bonuses, health benefits and pension benefits that would have been earned during the notice period. The ESA requires employers to continue all benefits (including pension plan contributions) throughout the statutory notice period which, depending on how long you have worked for the employer, can range from one to eight weeks.
However, unless an employment contract provides otherwise, the employer must continue making pension plan contributions even after the statutory notice period under the ESA ends – that is, they must pay the employee’s lost pension contributions or pension value over the employee’s common law notice period.
As long as there are no limitations to an employee’s common law notice entitlement within their employment contract, most employees may find it worthwhile to challenge their termination and seek common law notice – which is often more than entitlements provided under minimal standards law.
It is always best to seek the advice of an experienced employment lawyer, as various factors will influence the amount of an employee’s entitlements in their severance package, such as the language in the employment contract and the employee’s duties and compensation structure.
Salary Continuance vs. Lump Sum
If an employee is terminated without cause and given a severance package, the next issue is whether the employee is paid severance pay as a “lump sum” (cash payment), or as salary continuation over their notice period.
If employee’s job is terminated and paid severance in a lump sum, he/she stops participating in the DB Pension Plan, and therefore no longer accrues pensionable service (credit). This will naturally affect its value. As such, given that the employee is not continuing to accrue pensionable service in the DB Pension Plan during the reasonable notice period, it usually means the employee has suffered a loss in their pension plan, for which he is entitled to be compensated for as part of his claim for wrongful dismissal damages.
In a wrongful dismissal case, the employee is owed damages (compensation) for the loss in their DB Pension Plan. This amount is generally the difference in the present value of the pension at the time of termination and the end of the reasonable notice period (which is difficult to calculate and often requires advice from a qualified pension expert/actuary).
For example, in the leading case of Peet v. Babcock & Wilcox Industries Ltd., an Ontario court confirmed that, in the case of a DB pension plan, the employee’s damages for wrongful dismissal is the loss in the value of the pension plan itself – and not simply the employer’s pension contributions during the notice period (which is often the lesser amount).
Defined Contribution Pension Plan and Severance Packages
With a Defined Contribution (DC) Pension Plan, the employee contributes a portion of their salary to the pension plan (which employers typically match up to a certain amount). However, the value of the pension plan will depend on various factors, such as the total contributions, interest rates the performance of the many assets invested in the individual retirement plan (e.g., mutual funds, stocks and bonds). Generally, the employee’s pension benefits are not guaranteed income for life.
With this type of pension plan, the amount of wrongful dismissal damages the employee is entitled to receive correspond to the length of the notice period. That is, the employer owes the value of the pension contributions that would have otherwise been made during the notice period. For example, if an employee’s notice period is 10 months, the employer must provide 10 months’ worth of pension plan contributions (in addition to their salary, bonuses, health benefits, etc.).
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In a termination of employment and severance package, the amount of the pension loss is important to consider when evaluating the true value of the employer’s severance offer.
Understanding a termination letter or severance package often requires understanding the impact on your employee pension plan. If you think that your employer is not compensating you fairly for your pension in your termination package, please call Bune Law to discuss your rights and options. To speak with an experienced employment lawyer, please contact 647-822-5492.
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