Howard Levitt: Excluding Pension Benefits from Severance Is Costly Legal Risk
A comprehensive severance package must consider the entire compensation picture. According to employment lawyer Howard Levitt, failing to do so is not only unfair to employees but also creates significant legal dangers for employers. This oversight can result in substantial financial liabilities that many organizations underestimate.
The True Purpose of Severance
When an employee is terminated without cause, Canadian law requires more than just providing weeks of salary. The fundamental purpose of notice or severance is to place the employee in the exact financial position they would have occupied had they continued working through a reasonable notice period. While this principle appears straightforward, its practical implications are complex and far-reaching.
Reasonable notice encompasses all elements of compensation that the employee would have earned or enjoyed during that period. This includes not only base salary but also health and dental benefits, bonuses, commissions, stock plans, car allowances, and critically, pension accrual. If the notice period is determined to be 12 months, the entitlement is not simply 12 months of salary but rather 12 months of fully monetized employment.
The Common Oversight That Costs Millions
Despite clear legal requirements, employees and their legal representatives frequently leave substantial sums on the table by focusing exclusively on salary while ignoring other benefits that can be worth significantly more. Employers, for their part, are often content to let this oversight remain unchallenged, potentially saving themselves considerable expense in the short term but creating legal vulnerability in the process.
The governing legal principle is well-established: benefit plans must continue throughout the notice period or be compensated in cash. This includes bonuses that would have vested during the notice period, commissions that would have been earned, and pension contributions that would have accrued. Any deviation from this standard represents a legal shortcut that carries substantial risk.
The Critical Importance of Pension Benefits
No benefit is more frequently misunderstood or more financially valuable than company pension plans. For long-service employees, pension entitlements often represent the most significant asset they own outside their primary residence. Both employment standards legislation and common law protect pension entitlements during the notice period, with statutory minimums serving only as the baseline requirement.
The common law goes much further, requiring employers to compensate dismissed employees for the full pension value they would have accrued had they worked through the entire reasonable notice period. This legal obligation creates substantial financial exposure that many employers fail to properly account for in their severance calculations.
Calculating Pension Exposure
In practical terms, if an employee is owed 12 months' notice, the severance package must reflect not only 12 months of salary but also 12 months of pension growth. For defined contribution plans, this typically means missed employer contributions plus investment growth. For defined benefit plans, the financial exposure can be dramatically larger and more expensive to calculate.
Determining the present value of an additional year or two of credited service in defined benefit plans often requires actuarial expertise, and the resulting figures can dwarf the employee's annual salary. This becomes particularly explosive when pension plans contain specific thresholds that unlock unreduced retirement benefits once an employee reaches certain age-plus-service combinations.
Consider this common scenario: a pension plan allows an employee to retire with an unreduced pension once their age plus years of service equals 90. A 63-year-old employee with 27 years of service reaches this threshold, while a 62-year-old with identical service does not. The difference in pension entitlement between these two employees can be substantial, creating significant legal and financial implications for employers who fail to properly account for these benefits in severance packages.
The failure to include pension benefits in severance calculations represents more than just an oversight; it constitutes a serious legal miscalculation that can result in substantial financial penalties for employers. Proper severance planning requires comprehensive consideration of all compensation elements, with particular attention to pension entitlements that often represent the most valuable component of an employee's total compensation package.
