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March 05, 2014
Court says pension benefits not deductible from severance pay

The Supreme Court has ruled that an employee’s pension benefits cannot be deducted from damages paid for his/her dismissal without cause.

The decision by Canada’s highest court separates pensions from earlier court decisions that allowed employers to offset disability income payments from severance awards.

The case involved a man who had worked for 42 years for a major technology company.  At age 65, he was terminated without cause and provided with two months’ notice.  He then filed a suit for wrongful dismissal.

Since he was eligible to receive pension benefits, the former high-tech employee began to collect a pension of more than $2,100 per month after his termination.

In reviewing his case, the lower courts ordered his severance award to be increased to 20 months.  In addition, it ordered that his pension benefits be excluded from the increased settlement. The employer then appealed the case, citing the Sylvester v. British Columbia court decision that allowed an employee’s disability benefits to be deducted from a similar severance arrangement for dismissal without cause.

At issue was the question of whether disability payments and pension income payouts amount to the same thing when it comes to severance arrangements.  While both amount to an income in practical terms, the intent and structure of the payments differ, the Supreme Court ruled.

In its review, the high court said that the closer a benefit is to being an indemnity against a loss of income, the stronger the case for an offsetting deduction from severance payments. However, the Supreme Court noted, pension payments are not an indemnity against a loss but a form of retirement savings paid as deferred compensation in consideration of service.  As a result, the terms of the Sylvester v. British Columbia decision do not apply to pensions.  

The ruling applies even when a pension plan is funded entirely by an employer, the court stressed.

For plan sponsors, the Supreme Court ruling should underscore the importance and uniqueness of pensions.  To avoid potential litigation, accrued pension benefits should not be included in total severance calculations.

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