© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the April 2006 edition of BENEFITS CANADA magazine.
The Law: Clear and present danger
More transparent language in pension documentation may prevent extending pension benefits in wrongful dismissal awards.
By Barbara Austin

THE ACCRUAL OF BENEFITS UNDER REGISTERED PENSION plans is generally restricted to periods of employment under the terms of the plans and under relevant tax laws. However, recent legal cases show that in most situations in which employees are dismissed without cause, the value of pension and other benefits that would have accrued during a reasonable notice period must be included in determining the appropriate amount of pay in lieu of notice.

The general common law rule is that an employee who is dismissed without cause is entitled to compensation for the salary and all other benefits that would have accrued had the employee been allowed to work until the end of the notice period. The recent decision of the Ontario Court of Appeal in Taggart v. Canada Life Assurance Co. emphasizes the importance of using clear language if an employee’s common law rights on termination are to be limited.

Taggart had worked for Canada Life for 30 years. He was dismissed following the acquisition of Canada Life by The Great West Life Assurance Company in 2003. His severance offer included two months’ of working notice and payment in lieu of 22 months’ notice but did not include compensation for the loss of pension benefits that would have accrued during the latter period.

Taggart wouldn’t accept the severance and claimed for damages in lieu of pension benefits under both a registered pension plan and a supplemental pension plan sponsored by Canada Life. At trial, Taggart claimed that he had never received an explanation of the pension plan terms which specifically stated that the establishment and implementation of the plan would not constitute an enlargement of any rights a member may have as an employee, that the member had only such rights as were provided in the plan and that the benefits under the plan would not be used to increase damages in respect of the termination of employment of any member.

The trial judge found in favour of Taggart on the basis that, to be valid, limits on an employee’s common law rights must be brought to the employee’s attention in some clear way and the employee must, expressly or by implication, agree to the limitation.

The Ontario Court of Appeal, which upheld the trial decision, confirmed that a payment in lieu of giving notice does not satisfy the employer’s contractual obligation to give actual notice unless it fully compensates the employee for the lost salary and other benefits which would have accrued through the notice period.

In finding that the pension plan language did not “explicitly deny the right to damages for lost benefits,” the Court held that the language in these plans was insufficient to limit Taggart’s right to those damages. Finally, the Court accepted that the pension plan was a “unilateral contract” and found that any ambiguity in its terms must be interpreted against the plan sponsor.

To effectively limit an employee’s claim in similar circumstances, the language of the pension plan must explicitly say that on dismissal the employee is not entitled to damages to compensate for the loss of pension benefits that would otherwise have accrued during the common law notice period. This is a higher standard than in the stock option cases. In those cases, where the plan was clear that the employee’s entitlement to continue vesting ended on the date of notice of termination, the courts have ruled that the employee did not have a right to continue vesting during the notice period and no damages were awarded.

It is important for companies and their advisors to review any such limiting language and consider whether it meets the test set out in the Taggart decision. Consideration could also be given to bringing any such limiting language(applicable to any employee benefit)to the attention of employees, particularly in the offer of employment and, at the very least, in summary plan descriptions or employee booklets.

Barbara Austin is a partner with Blake Cassels & Graydon, LLP in Toronto. barbara.austin@blakes.com