)

Severance Packages and the Employment Insurance Act

Judging from my own experience, I suspect that many Saskatchewan lawyers are largely

unaware of the rules and practices applicable to the federal institutions that administer the

Employment Insurance Act, S.c. 1996, c. 23. As a result, it is often difficult to advise

clients on the implications of mitigating employment insurance benefits from a severance

package. After setting out a basic summary of the EI program, this paper shall examine

the extent of the duty to mitigate this source of income. I shall then conclude with a

review of the recent choice of forum cases concerning the concept of "misconduct" under

the Act and 'just cause" in the common law. In spite of the technical and administrative

nature of the Employment Insurance Act, it is a truly venerable aspect of our Canadian

identity. Practically all employees (and employers) pay into this scheme, and

approximately 3 million Canadians receive EI benefits per year. In this paper, I have

relied extensively upon information published on the Government of Canada's web site

to examine the basic features of this important safety net program.

Statutory Scheme

The employment insurance program is under federal jurisdiction and is contained in the

Employment Insurance Act, the Employment Insurance Regulations (SOR/96-332), and

numerous other Regulations such as the Insurable Earnings and Collection of Premiums

Regulations (SOR/97-33) and the Employment Insurance (Fishing) Regulations

(SOR/96-445). All of these Regulations have been amended on a periodic basis since

th~ir original inception. Throughout the paper, references to the "Regulations" are

restricted to the Employment Insurance Regulations as amended to the time of writing.

The employment insurance scheme first came into existence in 1935, but was struck

down by the Privy Council in the Unemployment Insurance Reference, [1937] AC 355.

By 1940, the federal government obtained the approval of the provinces to seek an

2

amendment to section 91 of the British North America Act by adding "UnemploYment

insurance" in subparagraph 91(2A). The first benefits were paid out in 1942 under a new

federal statute entitled the Unemployment Insurance Act. In 1971, the legislation

received a major overhaul to extend coverage to workers who experienced even a

temporary shortage of work. The amendments also provided for sickness and pregnancy

coverage.

Ever since the 1940s, the EI program has been subject to competing interests and values.

At a formal level, the program operates on social insurance principles designed to pool

risks and the costs of unemployment for people with stable, full-time jobs. But on a more

compassionate basis, the plan serves a greater political purpose of shielding various

regions of the country from the debilitating impact of short-term work, seasonal work

patterns and low wages. In addition, as already mentioned, during the 1970s the federal

government introduced special benefits to cover other absences from the workforce due

to pregnancy, sickness or parenting obligations.

On June 20, 1996, the new Employment Insurance Act came into effect. Although it

contains some of the redistribution goals of its predecessor, the Unemployment Insurance

Act, R.S.C. 1985, c. U-1, the new legislation places a far greater emphasis on the

insurance components of the original scheme. Under the new Act, there are two major

components of the employment insurance system: income support and unemployment

assistance. The first part consists primarily of wage subsidies or earnings supplements

provided through the National Employment Service. This Service operates in

conjunction with provincial programs and is aimed towards retraining groups

traditionally exposed to high unemployment. The second part, unemployment assistance,

has become more limited by various degrees to motivate unemployed persons to return to

the labour force. In this paper, my focus is on this latter aspect of the Employment

Insurance Act.

Two government agencies are responsible for the administration of the Employment and

Insurance Act, the Canada Customs and Revenue Agency and the Department of Human )

)

)

3

Resources Development Canada (The Canada Employment Insurance Commission exists

within HRDC). The first deals with collection of premiums, the second with payment of

benefit. For the year 2002, employers are required to pay a premium rate of $3.08 per

$100 of each employee's earnings - up to a maximum of $1201.20 per year. Each

employee pays $2.20 for each $100 of his/her salary - up to a maximum of $858 for year

2002.

Within five days of an interruption of employment, the employer is obligated to issue a

Record of Employment (ROE) and send it to the Commission's office in Bathurst, New

Brunswick. This document contains crucial information for EI purposes: length of

employment, rate of pay, expected date of recall, total insurable hours, total insurable

earnings, and most controversial, the reason for issuing the ROE. Common headings

(selected from codes on a table located on the ROE) relate to "shortage of work", "return

to school", "illness or injury", "quit", 'retirement", and "dismissal". As well, the

employer is permitted to explain the exact circumstances of the cessation of work. For

example, this may be the only way to characterize a restructuring of the employer's

overall workforce.

Employees in the workplace for the first time, or who have been absent for two years or

more, need at least 910 insurable hours (26 weeks at 35 hours per week) to qualify for EI

benefits. Otherwise, the minimum threshold to qualify for benefits ranges from 420 to

700 insurable hours, depending upon the unemployment rate in the employee's region.

In Saskatchewan, employees in Regina and Saskatoon must work at least 700 hours

whereas in Northern Saskatchewan, employees qualify after 420 insurable hours.

Once unemployed, the individual has up to four weeks from the final day at work to

submit an application for EI benefits. Other than in cases of late filing, there is a two­

week waiting period after the last day of employment before benefits are payable. Once a

person applies for benefits, the Commission determines a benefit period. Normally this

period consists of 52 weeks after the date of application. During this period, the

employee receives benefits for a minimum of 14 weeks and a maximum of 45 weeks,

4

again depending upon the unemployment rate for that region. In Regina and Saskatoon,

the maximum is 36 weeks, whereas in Northern Saskatchewan, employees are entitled to

the overall maximum of 45 weeks. The rate of benefits is dependent upon past income.

The basic benefit rate is 55% of average insured earnings up to a maximum weekly

payment of $413 taxable income. If the employee has dependents, this rate is increased

to 60% so long as the annual family income is under $25,921.

Other than regular benefits for a lack of work, the employment insurance scheme also

provides special benefits for sickness, maternity, parental leave, fishing and enrollment in

a developmental program. The subrogation rules (at least as far as mitigation of

severance payments is concerned) remain the same for all of these types of benefits.

Not surprisingly, there are direct penalties for EI fraud. Employees and employers who

knowingly hold back information or change the facts to make a false claim can be

charged and penalized under the Act. In general terms, claimants will face penalties up

to three times their weekly benefit rate or three times the amount of any overpayments.

In addition, employees will have to meet higher thresholds if they have committed an

offence under the Act. For instance, if the value of the overpayment on which the

violation is based is less than $1,000, the employee will be required to accumulate a

minimum of 525 hours instead of the minimum 420 hours.

If employers are found guilty of fraud, including falsification of a Record of

Employment, they can be fined up to $12,000 or the total of the claimant penalties in

collusion cases. Likewise, corporate directors or officers may be penalized for fraud if

they make false statements while acting for an employer. They can also be held liable to

pay if the corporation cannot pay the penalty.

)

5

Mitigation of EI Benefits

The Employment Insurance Act and Regulations specifically prohibit a claimant from

receiving benefits if that person is in receipt of "earnings" from some other source of

labour income during the same period of time the claimant is receiving or has received EI

benefits. In this paper, I am only concerned with severance packages. Under sections 45

& 46 of the Employment Insurance Act, both the employee and employer have an

obligation to report severance compensation, deduct EI earnings from the severance

payment, and remit these funds to the Canada Employment Insurance Commission:

45. If a claimant receives benefits for a period and, under a labourarbitration award or court judgment, or for any other reason, an employer,a trustee in bankruptcy or any other person subsequently becomes liable topay earnings, including damages for wrongful dismissal or proceedsrealized from the property of a bankrupt, to the claimant for the sameperiod and pays th~ earnings, the claimant shall pay to the ReceiverGeneral as repayment of an overpayment of benefits an amount equal tothe benefits that would not have been paid if the earnings had been paid orpayable at the time the benefits were paid.

46. (1) If under a labour arbitration award or court judgment, or for anyother reason, an employer, a trustee in bankruptcy or any other personbecomes liable to pay earnings, including damages for wrongful dismissalor proceeds realized from the property of a bankrupt, to a claimant for aperiod and has reason to believe that benefits have been paid to theclaimant for that period, the employer or other person shall ascertainwhether an amount would be repayable under section 45 if the earningswere paid to the claimant and if so shall deduct the amount from theearnings payable to the claimant and remit it to the Receiver General asrepayment of an overpayment of benefits.

The definition of "earnings" for benefit purposes is contained in section 35(2) of the

Employment Insurance Regulations and covers "the entire income of a claimant arising

out of any employment." Section 35 is extremely detailed, and it would be prudent to

consult the actual list of inclusions and exclusions to make this determination. However,

for our broader purposes, all sources of moneys or non-pecuniary benefits (such as living

) expenses) earned by one's labour are deductible, whereas other moneys relating to

6

investment or debt are not. Thus, a first distinction can be drawn between payment for

the loss of wages and other non-pecuniary benefits, and payments for a share of the

business equity or unpaid vacation and overtime pay. Only the first group is treated as

earnings to reduce EI benefits.

Secondly, there is a distinction between compensation for the severed employment

relationship and compensation for new job-related expenses. Those aspects of the

employer's package that are based upon new expenses are not earnings and therefore do

not have to be taken into account in reducing EI benefits. Again, this i.s an area in which

it is necessary to take extreme caution because of the detailed provisions of the

Regulations. A common example is moving expenses. If the employer has directly paid

these costs, the Commission will grant an exemption for this exact amount. If the

employer has simply given the employee moneys for these expenses, the Commission

will require receipts from the employee to show actual payment or, in some situations,

evidence of comparable rates. This latter arrangement allows the employee to move by

his own effort and pocket the difference. Other examples include retraining expenses

(tuition and books, but not a living allowance) and ongoing payment of non-pecuniary

fringe benefits provided after the date of termination (dental and health insurance).

The third exception to allocated earnings is derived from damages for loss of prestige,

injury to reputation, and the infliction of mental distress. If part of the compensation

package includes these types of damages, the Commission may require convincing

evidence the employee was entitled to these payments, and both parties expressly agreed

to this arrangement. If these headings are contained in a court or arbitration award, the

Commission accepts these types of damages at face value.

Finally, lawyer's fees, court costs, disbursements and other legitimate expenses directly

related to.the legal action or settlement can be deducted from severance payor an award

for wrongful dismissal damages. Likewise, any money paid by the employer directly to

reimburse these expenses is not part of the employee's earnings. These expenses fall

under section 35(10) of the Regulations. This provision allows for a deduction of )

7

"expenses incurred by the claimant for the direct purpose of earning that income". If

these expenses must be apportioned between earnings and other headings of damages, the

apportionment will be adjusted according to the percentage of each of these types of

damages.

Once it is sorted out which portion of the package constitutes earning and which does not,

there are a few other rules that must be kept in mind. First of all, no matter when the

payment is made, it is applied to the period of time immediately following the cessation

of the work relationship. Thus, the claimant cannot avoid repayment of EI benefits by

structuring a late (or early) settlement. Second, once it is determined that the

compensation was for the loss of wages or other employment-related benefits, it does not

matter what the claimant does with the money. Even if it is directed towards an RRSP, it

is still treated as earnings for the purposes of the Employment Insurance Act. Both of

these propositions are contained in section 36(9) of the Regulations:

(9) Subject to subsections (10) and (11), all earnings paid or payable to aclaimant by reason of a lay-off or separation from an employment shall,regardless of the nature of the earnings or the period in respect of whichthe earnings are purported to be paid or payable, be allocated to a numberof weeks that begins with the week of the lay-off or separation in such amanner that the total earnings of the claimant from that employment are,in each consecutive week except the last, equal to the claimant's normalweekly earnings from that employment.

Third, it is important to understand the actual implications of the new earnings. If EI

benefits were already paid, the claimant and/or employer have an obligation to repay

these benefits for an equivalent period as if the earnings were wages. Thus, if an

employee receives a severance payment of $1,000, and she had been earning $1,000 per

month, she (and the employer) would be obligated to repay 4 weeks of benefits. If EI

benefits have not been paid, the claimant is not entitled to receive benefits for this

equivalent period of time. However, in both instances, the employee can, in certain

instances, apply for an extension of the one-year benefit period, to a 2-year period. For

example, if an employee entitled to 36 weeks of benefits received 18 months of

) severance, she would be obligated to do the following. First, she (or her employer)

8

would repay the 36 weeks of benefits. Then she would apply for an extension of the

benefit period, and, if still unemployed, collect El benefits for the last 6 months (24

weeks) of the new benefit period.

Fourth, there is provision under the Employment Insurance Regulations, s. 37, for the

payment of Supplemental Unemployment Benefits (SUB Plan). These Plans must be

approved in advance of operation, and are designed to cover "any period of

unemployment by reason of a temporary stoppage of work, training, illness, injury,

quarantine or any combination of such reasons" (s.37(2)(b)). It should be noted that

under s. 37(2)(i), the SUB Plan cannot reduce the employee's accumulated sick leave,

vacation leave, severance payor any other accumulated credits from employment. If all

of these conditions are met, the SUB Plan is not considered "earnings".

Misconduct versus Just Cause

Recently, the Ontario Court of Appeal rendered two decisions on the subject of issue

estoppel arising out of the Employment Insurance Act. Section 30(1) states, "A claimant

is disqualified from receiving any benefits if the claimant lost any employment because

of their misconduct or voluntarily left any employment without just cause". In Minott v.

O'Shanter Development Co. Ltd. (1999),42 OR (3d) 321 and Schweneke v. The Queen in

Right of Ontario (2000), 47 OR (3d) 97, the employers raised the doctrine of issue

estoppel to prevent employees from pursuing wrongful dismissal actions. In both

instances, the employees had been turned down for El benefits because of a finding of

"misconduct" under the federal legislation.

In Minott, Mr. Justice Laskin applied the traditional three-part test and concluded issue

estoppel did not apply to the facts in that case. Although he found the El decision was

final, he ruled in favour of the employee on the other two preconditions. First, the parties

to the proceedings had to be the same. Since the defendant employer had not actively

participated in the Board of Referees hearing, it could not be considered a party to that)

)

)

9

proceeding. Second, the prior proceedings must have involved the same issue. The

Court of Appeal ruled misconduct did not equate just cause for dismissal:

Just cause for dismissal .. , demands a broader inquiry than the search formisconduct under the Act. To decide whether an employer had just causefor dismissal, a court may have to take into account a host ofconsiderations: the seriousness of the employee's misconduct; whether themisconduct was an isolated incident; whether the employee receivedwarnings; the employee's length of service; how other employees weredisciplined for similar incidents; and any mitigating considerations.Misconduct under the Act seems to focus more narrowly on theemployee's actions that led to the dismissal.

But even if all of the elements had been met, the Court of Appeal would have exercised

its discretion to reject the claim of issue estoppel in any event. In this situation, there

were five potential reasons that could have lead to an unjust result:

• The Employment Insurance program established a process to ensure

benefit claims were adjudicated quickly, inexpensively, and summarily

before a Board of Referees. There is a risk of creating an incentive to over

litigate if these hearings in effect had to determine just cause for dismissal.

• Employees apply immediately for EI benefits and thus are not considering

the impact of this process on their civil remedies.

• The financial stakes are generally lower under the Act than at common

law.

• There are considerable procedural differences in the two proceedings.

• The expertise of the board of Referees is significantly different that the

expertise need to determine a wrongful dismissal action.

10

Accordingly, the trial judge's decision was allowed to stand. Minott succeeded in

demonstrating the employer lacked cause for its decision to terminate his employment,

and was awarded 13 months' pay in lieu of notice.

In Schweneke, the facts were slightly different, and consequently led to a different result.

Schweneke was suspended without pay during a fraud investigation. Before the

employer rendered a decision, he quit but later argued he had been constructively

dismissed. In the first instance, he sought EI benefits. Initially, he was successful, but

this decision was overturned, first by the Board of Referees, and the~ on appeal, by an

Umpire, on the basis of a finding of misconduct. It should be noted that many of the

Umpires are retired federal court judges.

Subsequently, Schweneke brought a civil action for constructive dismissal. This time,

the Court of Appeal ruled issue estoppel applied to the facts. Most significantly, the

Umpire defined misconduct as just cause and Schweneke pleaded the same facts in his

civil action. On the issue of discretion, in this case the Court of Appeal ruled Schweneke

must first demonstrate that unfairness actually arose in his situation. Since he could not

meet this test, he was prevented from pursuing his constructive dismissal action.

Shortly after these decisions were released, the Supreme Court of Canada weighed in on

issue estoppel, only this time under the Ontario Employment Standards Act. In Danyluk

v. Ainsworth Technologies Inc., [2001] 2 SCR 460, Ms. Danyluk initially contacted an

employment standards officer to assist her collect $300,000 in unpaid commissions.

Later, when this course of action proved unsuccessful, she commenced a wrongful

dismissal action. The employer argued her claim was barred by issue estoppel.

The Supreme Court held that although the preconditions of issue estoppel were met, the

lower courts should have exercised their discretion in favour of Ms. Danyluk:

As a final and most important factor, the court should stand back and,taking into account the entirety of the circumstances, consider whetherapplication of issue estoppel in the particular case would work an )

)

)

11

injustice. [The Court of Appeal] concluded that [the employee] hadreceived neither notice of the [employer's] allegation nor an opportunity torespond.... Whatever [the employee's] various procedural mistakes in thiscase, the stubborn fact remains that her claim to commissions worth$300,000 has simply never been properly considered and adjudicated.

These cases demonstrate a strong inclination to allow separate hearings for administrative

and civil remedies. In light of the potential risks listed in Minott and again confirmed in

Danyluk, employees are well advised to take timely advantage of both sets of remedies.

Unless the employer is prepared to make an immediate and reasonable severance

payment, employees should seek employment insurance benefits even-if misconduct has

to be determined in the first instance. If they win, they have a minimal income to pay

routine bills plus they may be able to argue issue estoppel against the employer. After all,

these arguments should work both ways. If they lose, they may either learn how to win at

the second go-around, or they may realize the evidence against them is too overwhelming

and should be left alone.

Conclusion

The basic objective of this paper has been to set out enough detail of Canada's mandatory

employment insurance scheme to ensure employers and employees alike can dovetail

statutory benefits and common law damages in the best interests of the unemployed

person. From my perspective, this objective does not aim to cheat the system or even

play both sides against the middle. Rather, a coordinated approach seeks to compensate

employees sufficiently to find a decent alternate job and retrain, if this is necessary to

better utilize their interests, skills and abilities. These goals emphasize the importance of

work. As such, society is well served if employees are adequately cared for during their

darkest need. We can only hope they land on their feet and once again find productive

employment.

I

I) I

I

I

I

I

I

I

I

I

I

I

I)

I

I

I

I

I

I

I

I

I

I

I

) II

II