Terminations & Employee Pension Plans

When an employee is terminated without cause, the employee is entitled at common law to their salary and benefits that they would have received had they not been terminated, throughout the reasonable notice period, subject to any deduction on account of mitigation.

If the employee has a pension plan through their employment, they  want to know whether it is a Defined Benefit Pension Plan or a Defined Contribution Pension Plan (“DCPP”).  A DCPP is akin to an RRSP and often, there is no issue with the Company continuing to make its contributions to the DCPP during the notice period or to pay a lump sum amount in lieu thereof.

The Company may act differently if the employee is a member of a Defined Benefit Pension Plan. If the employee is being paid a severance package in a lump sum amount, they have ceased to accrue credited service  in the Defined Benefit Pension Plan at the date of termination or at best, at the end of the statutory notice period under the Ontario Employment Standards Act, 2000 which is at most 8 weeks. It also means that the employee is in fact not receiving an 18 month severance package as characterized by the Company.

For example: At the time of termination, the employee’s remuneration package consists of an annual base salary of $150,000.00 and a Defined Benefit Pension Plan. The Company states they are offering the employee 18 months’ calculated on base salary only  for a total lump sum payment of $225,000.00. The pension actuary (hired by the employee’s lawyer) determines that there is a loss of $100,000.00 in the increased value that otherwise would have occurred in the employee’s  Defined Benefit Pension Plan if the employee had accrued credited service over that 18 month period . As such, the employee is receiving significantly less than 18 months because they did not receive any compensation for the loss in their Defined Benefit Pension Plan.

There are other issues that are of importance with respect to the Defined Benefit Pension Plan such as if the employee is nearing the point of being eligible for “an unreduced pension”. This could be very significant.

In order to be able to appropriately assess a severance package, the employee must know and understand the value of what is both included and excluded from the Company’s proposed severance offer.