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Loss of benefits under employer-provided pension plans

Much has been written about our aging workforce and the implication for employers of the coming tide of retirements. The premiers and Prime Minister recently met to attempt to deal with those workers who do not have company pension plans by enhancing the benefits available under the Canada Pension Plan, unfortunately without success. Clearly, retirement planning and the funding for that retirement are hot issues.

pensionOne of the more difficult issues that often arise in wrongful dismissal litigation is quantifying the loss benefits under employer-provided pension plans. Generally, the benefits payable to a retiring worker under those plans increase based on years of service. While a wrongfully dismissed employee is entitled to be compensated for the loss of salary and benefits he would have earned during the period of notice, the question is often faced whether he is entitled to be compensated for the diminution in pension benefits resulting from such dismissal. If he is, in fact, entitled to such compensation, how is the amount to be quantified?

This issue was first addressed by the Ontario Court of Appeal in its seminal 2001 decision in Peet v. Babock and Wilcox. As part of the plaintiff’s claim for damages for wrongful dismissal, he alleged that had he been given the appropriate amount of notice of his dismissal, which the court set at 24 months, his monthly pension benefit would have been approximately $170 greater than it was. At trial, he presented actuarial evidence that he would require an annuity with a capital value of $33,357 to generate a sufficient return to make up for this loss. This was the quantification of the damages he was claiming for the loss.

The employer in turn called expert evidence that the earlier commencement of the plaintiff’s retirement benefits, even at the lower rate, would result in an increased present value of these benefits. The defendant therefore argued that the plaintiff had not suffered a loss.

The trial judge accepted the plaintiff’s evidence and awarded damanges of approximately $24,000 to compensate for the loss of benefits, and then grossed-up that amount to $49,000 to account for taxes which the plaintiff would have to pay on the revenue generated by the award.

The employee appealed the decision. In reversing the trial decision, the Court of Appeal found that the trial judge had made two fundamental errors:

  • He failed to give credit for the pension benefits actually received by the plaintiff during the eighteen-month notice period; and
  • He failed to reduce the award based on the provisions of the plan that expressly precluded simultaneous accumulation of pensionable service and payrment of pension income. In other words, if the employee was drawing pension benefits, he was precluded in any event from accumulating pension entitlement

Finally, the Court of Appeal rejected the gross-up for taxes as it reasoned that the amount would have been taxable to the plaintiff had he received them in the normal course. In summary, the Court of Appeal reversed the trial decision on the basis that there was no loss to plaintiff.

The Court of Appeal relied on earlier decisions of the Court for the principle that the calculation of pension loss must be based on the commuted value method. This method fixes the loss as the present value of the difference between the value of the pension at the time of termination and the value at the end of the period of reasonable notice.

The Court of Appeal rejected a reduction of the damages by an amount equal to the pension payment received during the notice period. However, it held that where there is actuarial evidence that the overall value of the pension fund is increased by the payments during the notice period, this increase should be factored into the determination of whether a pension loss has in fact been suffered. It was the court’s finding that to do otherwise could put the employee in a better position thant he would have been in had he not been terminated.

The Court of Appeal also rejected the trial judge’s award of an additional amount to gross-up for income tax. The Court of Appeal pointed out that had the employee continued his employment, the amounts he would have eventually received under the pension plan would have been taxable. Thereforce, the taxation of amounts paid out from an annuity purchased with the judgment proceeds should receive the same treatment. In the final result, the Court of Appeal reduced the trial judgment by $50,000.

The Ontario Court of Appeal took up the issue again in 2005. In this case, the plaintiff had worked for the Canada Life Company for thirty years, rising to the position of vice president. When Canada Life was purchased by Great-West Life, the plaintiff’s position was eliminated. He was offered twenty-four month’s severance, comprised of two months working notice and payment equal to twenty-two months of salary in lieu of notice. However, the severance offered did not include any compensation for the loss of the continued accrual of pension benefits. The plaintiff therefore rejected the offer and sued for damages.

When the matter came to trial, the parties had settled all issues other than the claim for loss of pension benefits. The employer relied on provisions in the pension plan which purported to preclude the enhancement or increase in any rights of the employee based on the pension plan provisions. The defendant argued that this provision in the plan prohibited the court from extending the pension accrual rights during the notice period. The trial judge rejected that argument, holding that the provisions of the plan were not sufficiently specific “to demonstrate clear and unequivocal terms binding on the [employee] capable of limiting the accrual of his pension right.”

The employer appealed the decision to the Ontario Court of Appeal. In dismissing the appeal, the court held that the claim was not on for benefits under the pension plan, but rather for common law damages for breach of contract. The court referred to Bardal v. The Globe & Mail, the leading case on wrongful dismissal damages, for the principle that the wrongfully dismissed employee is entitled to be compensated for the value of what he would have received during the period of reasonable notice. This would include the value of the loss of pension benefits which would have accrued during that period. The Court of Appeal also pointed out that, as the pension plan was a unilateral contract—i.e., one that was not negotiated by the plaintiff—any limitation of liability had to be narrowly construed. As the provision was not sufficiently clear and unequivocal, it could not eliminate the plaintiff’s rights to common law damages. The Court of Appeal therefore dismissed the appeal.

A similar conclusion was reached by a trial judge of the Ontario Superior Court in 2007. The case arose out of the major restructuring of Ontario Hydro in 1998 when Hydro was “demerged” into Hydro One and Ontario Power Generation (OPG). The plaintiff had commenced employment with Ontario Hydro in 1974. As a result of the changes imposed on the management of OPG by the Ontario Government in 2004, the plaintiff resigned, alleging that he had been constructively dismissed.

The trial judge agreed with this position. He therefore went on to consider the plaintiff’s damage claim which included a claim for the loss of the value of his pension due to his termination. As the plan in question was a defined benefit plan, which paid out a set amount based on years of service, the plaintiff’s dismissal resulted in a loss of pension benefits. However, as a result of the dismissal, the plaintiff also received these benefits earlier than he otherwise would have. The trial court accepted the actuarial evidence called by the employer and concluded that the plaintiff would actually receive a greater amount from the plan as a result of his dismissal. The court therefore dismissed that portion of the plaintiff’s claim.

While the court’s acceptance of the employee’s entitlement to compensation for loss of pension rights is clear, the quantification of the resulting loss is often difficult. This quantification is made more complicated by the possibility that the employee could leave the funds in the company-operated pension plan even though his employment had been terminated. Whether an employee is entitled to do so depends on the provisions of each individual plan. Obviously, detailed legal advice is required prior to an employer making any proposal with respect to compensation for loss of pension benefits.

Earl Altman
Garfinkle, Biderman LLP

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Earl Altman

Legal consultant at EA Consulting
Earl Altman was a partner at Garfinkle, Biderman and now heads his own consulting firm. Earl has practiced commercial and employment litigation. Earl’s practice focuses on employment disputes, including acting for employees and employers in wrongful dismissal claims, and in breach of contract and breach of fiduciary duty claims. Read more
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