Going out of business, Canadian Employment Law Today (February 23, 2011)

Dismissed employees with a certain amount of service are usually entitled to statutory severance pay. For example Ontario employees with at least five years of service are entitled to one week of wages for every year of service up to 26 weeks, if their employers’ payroll is at least $2.5 million or 50 or more employees were dismissed within a six-month period due to a business closure. Severance pay compensates for loss of employees’ service credit and job-related benefits. But sometimes other factors can reduce this compensation.

In Ontario, in the first significant decision involving a severance pay exemption — CAW-Canada, Local 1451 v. Kitchener Frame Ltd. — the Ontario Divisional Court grappled with the question of whether employers are exempted from paying severance pay to employees who retire with actuarially unreduced pension due to a business closure. In dismissing the employees’ appeal, the court found they were not entitled to severance pay if already receiving unreduced pension benefits. This employer-friendly decision can be contrasted with that reached by the British Columbia Court of Appeal in Ted Leroy Trucking Ltd., Re, where it considered employees’ claims for benefits recoverable from a bankrupt employer as part of wages.

Ontario: Severance pay vs. pension benefits

Until it went out of business in 2009, Kitchener Frame was a manufacturer of automobile parts with a generous pension plan permitting younger workers to retire early with income security. The plan specifically contemplated early retirement eligibility upon plant closure. While many employees were eligible to receive a supplementary pension payment — bridging them to the age of 65 — equal to the amount they would have received under the Old Age Security program, some were also entitled to a special early retirement allowance. Upon closing its plant, Kitchener Frame was subject to the severance pay requirements under the Employment Standards Act, 2000 (ESA).

The central issue in this case was whether Kitchener Frame’s employees were eligible for severance pay, notwithstanding the value of the pension benefits upon termination. Kitchener Frame took the position that all employees who received pensions fell under a regulatory exemption and no severance pay was due. The employees contended that on a proper valuation of the pension benefits the exemption did not apply and they were entitled to severance pay. The essential difference between the two positions is that Kitchener Frame argued the comparison under the exemption provision is based upon the commuted value of the pension, which must include the bridging and supplementary benefits value. The employees argued only the basic pension benefit should be included in the value calculation. In short, this case turned entirely on the interpretation of the term “actuarially unreduced pension benefit” in Ontario’s Termination and Severance of Employment Regulation.

“Actuarially unreduced pension benefit” is defined in neither the ESA nor the Ontario Pension Benefits Act. In its simplest form, it means a pension benefit paid without any penalty for early retirement. To qualify for the severance pay exemption, this pension must reflect “any service credits which the employee… would have earned in the normal course of events.” The court upheld the arbitrator’s position that this provision was designed to protect benefits employees would have earned in the normal course of events for the purpose of the pension plan. Therefore, the method of determining whether employees received the actuarially unreduced pension benefit must take into account “both the basic pension entitlements and other components and benefits” to which employees are eligible upon termination.

“To do otherwise would be to ignore the facts and specifics of the pension plan and to ignore the real effect of the termination on the affected employees,” said the court.

Everyone who is terminated has their opportunity to earn service credits cut short. If anyone whose service credits are cut short is entitled to severance pay, then the words in the exception would never apply. Were it intended to be so the words “reflects service credits which the employee…would have been expected to have earned in the normal course of events for purposes of the pension plan” would not have been added to the regulation. The court agreed with this proposition and dismissed the appeal.

Guidance for employers

Kitchener Frame confirms that the loss of the opportunity to earn service credits does not automatically entitle employees to severance pay. It suggests that in determining whether severance pay is payable, employers should follow these steps:

1. Consider the effect of a business closure on the value of pension benefits, which must take into account the value of the bridging and other supplementary benefits for eligible employees.
2. Compare the pension benefits employees received upon termination to the pension benefits employees would have earned if the business had not discontinued. Importantly, employers must use converted values in order to compare the value of one pension benefit to another, because it is “standard accounting and actuarial practice.”
3. Determine whether the total pension benefits employees received compensated them for the loss of service credits they could have earned in the normal course if the business had not closed.
4. Pay severance pay, if it is determined that the pension benefits received are less than what employees would have earned in the normal course if the business had not discontinued.

Despite being a pro-employer decision, Kitchener Frame cautions employers that just because employees may be entitled to receive pension benefits prior to their normal retirement age without any penalty for early retirement, this might not be enough to exempt them from statutory liability to pay severance.

British Columbia: What are wages under WERRA?

The British Columbia Court of Appeal decision Ted Leroy Trucking Ltd., Re, is an example of a recent pro-employee decision involving employees’ claims for benefits from a bankrupt employer. This appeal concerned whether the protection provided to wages under the province’s Wages Earner Protection Program Act (WERRA) and Bankruptcy and Insolvency Act (BIAS) extends to contractual payments employers made to third parties on employees’ behalf.

The WERRA establishes a scheme whereby eligible employees can recover up to $3,000 or an amount equal to four times the maximum weekly insurable earning under the Employment Insurance Act. The BIAS provides a limited priority to wages, salaries, commissions or compensation owed by a bankrupt for services rendered in the six months before the bankruptcy.

In Ted Leroy Trucking, employees argued the WERRA entitlement and BIAS priority extend to compensation of payments their bankrupt employer made on their behalf to third-parties, such as union dues, contributions to a health or welfare trust, health insurance premiums and payment to humanity and education funds. Century Services, the secured creditor of the bankrupt employer with the highest-ranking priority, contended that the protection extends only to funds payable directly to employees and not to money paid on their behalf to third-parties. The court disagreed and ruled the protection did extend to third-party payments.

Similar in its approach to Kitchener Frame, this case turned on the interpretation of the term “wages.” The WERRA broadly defines wages as “salaries, commissions, compensation for services rendered, vacation pay, severance pay, termination pay and any other amounts prescribed by regulation.”

Wages: Employees vs. third-parties

Relying on the words “compensation for services rendered” in the WERRA definition, the court held this “must mean all compensation earned by the employee.” Asserting that Parliament did not mean to include amounts not paid directly to an employee as wages, Century Services directed the court to the words “owing to the individual” in the WERRA and the description of prescribed wages as amounts paid directly to an employee, such as gratuities, bonuses and shift premiums. The court found it was not clear WERRA allowed for payments to anyone other than an employee.

The court concluded that under the WERRA and BIAS, the payments and the priority are for “the benefit of the employee,” not a third-party. Given that the legislation provides for a limited priority to compensation owed to employees, the court resolved that compensation might be in respect of a payment “directly or indirectly” remitted to a third-party. In dismissing Century Services’ argument this effectively gives third-party benefit providers a priority over secured creditors, the court concluded the legislation does not provide this priority. The deciding factor in the court’s analysis was the recognition that contractual payments made by employers to third parties are for the benefit of employees.

Against this background, the court saw no principled basis for differentiating between benefits paid for jointly by employers and employees or solely by employers, because those payments form part of employers’ compensation obligation and employees’ compensation entitlement.

Though Ted Leroy Trucking sends a loud message that just because a particular benefit is not referenced in the definition of wages in the WERRA, it will neither be excluded from employees’ compensation package nor will it serve to disentitle employees from recovering its value as part of wages owed by a bankrupt employer.