A recent court decision in Ontario illustrates the potential danger for employers that attempt to rely on pension plan terms to refute claims for pension-related losses in the context of wrongful dismissal actions.

The case, Williams v. Air Canada, involved a claim by a long-time employee whose employment was terminated in 2020 when the airline reduced its workforce by more than 50 per cent due to the coronavirus pandemic. When the employee didn’t accept the separation package offered by Air Canada, she commenced an action for wrongful dismissal.

In finding there was no dispute that Williams was terminated without cause and entitled to damages in lieu of reasonable notice of termination, the court was asked to determine the reasonable notice period and to assess her claim for damages.

Read: Termination of LTD benefits for Air Canada workers eligible to receive unreduced pension benefits doesn’t amount to age discrimination: court

On a motion for summary judgment, the court concluded that the appropriate notice period was 24 months and assessed her damages as including lost salary and the value of group benefits for the period and amounts in respect of any incentive and profit-sharing plan payments made in respect of fiscal year 2021. It also allowed her claim for damages representing the value of pension contributions during the reasonable notice period.

While this result wasn’t surprising, the court’s analysis of the claim and the arguments advanced by Air Canada in order to refute the claim for pension-related damages were interesting.

Effectively, the airline argued that the terms of the pension plan were clear and didn’t allow for the inclusion of amounts payable subsequent to termination of service in the calculation of pension benefits. In particular, Air Canada alleged that the pension plan calculated an employee’s monthly pension benefit based on allowable service, which it said was credited for any month during Williams’ employment for which compensation was paid.

Read: Air Canada pension investor signs UN-backed principles for responsible investment

The pension plan defined compensation as excluding “any amount payable subsequent to or on account of the termination of service.” However, while ‘termination of employment’ was defined in the pension plan text as the “cessation of continuous service which is not the result of retirement, nor the result of death,” the court noted the definition of compensation used the term ‘termination of service.’ The court then reasoned it was unclear whether termination of service was intended to have the same meaning as termination of employment.

On that basis, the court concluded termination of service could mean the end of the working notice period and that termination of employment must be taken to refer to an employee’s lawful termination absent clear language to the contrary.

In allowing the former employee’s claim, the court referred to the two-step approach to determine whether an employee dismissed without cause is entitled to damages in respect of a bonus or incentive benefit: firstly, would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?; and secondly, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?

Read: Air Canada, unions reach agreement to wind down pension trust

In applying that test, the court noted neither provision of the pension plan text clearly and unambiguously stated an employee isn’t entitled to pension accrual during the common law notice period.

While the result wasn’t unexpected, what’s surprising is the court’s parsing of the particular language of the pension plan in coming to that conclusion. Firstly, one must assume there was no written employment contract in place. A valid and legally enforceable contract limiting the employee’s entitlements on termination of employment without cause is the employer’s first line of defense against such claims.

Secondly, it doesn’t appear that the income tax rules governing registered pension plans — which generally limit eligible service and compensation for purposes of calculating an employee’s pension benefits to periods of employment where the employee is in receipt of employment income — were raised in the context of the employer’s defence.

Most importantly, the case suggests the language of the pension plan text itself may be relied upon in order to refute a claim for damages on this basis. Since very few pension plan texts are drafted with this issue in mind, it’s appropriate for employers to review the language of their plans and the related plan booklets to see how this issue is addressed.

Read: Charting a new course at the Air Canada pension plans

Generally speaking, a plan text that limits eligible service and compensation to periods where the employee is actively employed and in receipt of regular employment income or pay in lieu of statutory notice of termination but that excludes any other amounts received as a result of or following termination of employment or in respect of the common law reasonable notice period — other than in certain prescribed circumstances such as statutory leaves and eligible periods of disability— may assist in defending against claims.

Finally, a written and legally enforceable employment contract that clearly sets out how an employee’s pension entitlements will be treated on termination of employment without cause is the best way to counter such claims.

Read: Court dismisses Air Canada pilots’ appeal of mandatory retirement at age 60