Pay in Lieu of Notice and CERB
Here's a dime-a-dozen scenario:
Employee gets dismissed without notice. She sues her employer, but in the mean time, she applies for EI benefits - after all, she needs the cash. When she settles her wrongful dismissal claim, Service Canada looks at the income as creating an 'overpayment' - she may have to repay some or all of the EI benefits she received.
I had assumed that the same would be true of CERB. Now that I'm looking more closely, I'm not so sure.
You probably know that you can't get CERB benefits if you're making more than $1000 in the eligibility period, right? Well, at the margins, there's always a question of what kind of income gets included in that. So we look at the definition of 'income' for the purpose of the eligibility exclusion at section 6(1)(b) of the CERB Act...and it turns out that it's really narrow.
The Regulations don't have any impact right now. So we're really just talking about three types of income for the purposes of this exclusion: Employment/self-employment income; EI benefits; or surrogacy/foster care allowances.
To understand how narrow this is, consider some of the other areas where people might get an income stream: Capital gains; dividends; spousal support; inheritances; trust payments; social assistance; pensions; disability benefits; gifts; and others. None of these income sources will impact eligibility for CERB.
So the question of the hour: Does it include pay in lieu of notice?
I recently published a paper in the Alberta Law Review that turned heavily on considerations of exactly what wrongful dismissal damages are. Some of the earliest cases on the subject were tax cases from the 1970s, considering whether such damages (or settlements of damage claims) are employment income.
The answer was 'no' - but following amendments in 1978, they became taxable as retiring allowances.
However, that's a treatment for 'common law' pay in lieu of notice only. For statutory pay in lieu of notice, and for most contractual termination payments, that's probably employment income.
So when I'm talking about 'pay in lieu' here, I'm talking specifically about pay in lieu of common law reasonable notice. Other treatments might apply to other similar-looking income.
EI creates a framework for a clawback based on "earnings", or "earnings from employment", during the benefit period. You might think that this language makes me ask a similar question about EI clawbacks, but there are a few sections in the EI Act that expressly speak to overpayments resulting from payment of wrongful dismissal damages.
And when the employer pays out a wrongful dismissal settlement or judgment to somebody who has received EI benefits, the statute confers liability on both the employee and the employer for the overpayment.
Most of us, looking at the CERB framework, expected something similar.
Yet we didn't get it. There's nothing in CERB establishing employer liability for overpayments, nothing speaking to wrongful dismissal damages or pay in lieu of common law notice, nothing suggesting that the government will want its money back following a payout of a severance-type package.
On the strict language, and based on careful review of the underlying legal theory, I'd tend to take the position that common law pay in lieu of notice does not impact eligibility for CERB benefits, and does not result in an overpayment. (On express contractual severance payments or statutory termination pay, that's a tougher question. Also, more nuanced treatments might exist in cases of salary continuance.)
The government's online FAQs support this conclusion: "A severance payment does not impact an individual’s eligibility for the Canada Emergency Response Benefit."
But we already know that the government will be doing back-end eligibility verification at tax time, and given that the dust hasn't settled on the roll-out of these programs, there's further consideration warranted as to whether or not this was a policy decision by the government, or an error that they may correct - and then go after the benefits they've paid, with interest.
The fact that the FAQs themselves suggest that severance (albeit lacking in definition) doesn't affect eligibility...suggests that it's not something that the government has just missed. It's not determinative, though. The FAQs aren't a binding authority, and it's entirely plausible that there's a communication disconnect within the bureaucracy.
Yet the contemporaneous CEWS language had express language dealing with retiring allowances, in a way that suggests an awareness that they aren't generally lumped in with wages or other employment compensation.
However, it raises a serious question as to why. Why would the government say to an employee receiving a (potentially large) severance package, "Here's an emergency benefit anyways"?
The answer may be tied to the simplicity of the program. Many of the features of CERB are tied to streamlining the program to get loads of cheques out the door as quickly as possible. It has a benefit period much shorter than EI, and can be followed by EI benefits.
But the way that EI deals with these packages can be complicated, involving not just overpayments but also suspension of the running of benefit periods. Ultimately, if somebody is out of work for a long period of time, the EI overpayment comes out in the wash - they still get their full EI benefit claim, and full pay in lieu of notice. But the processing and timing of benefit claims gets elaborate.
With CERB, it's only available for a finite period in the first place, and you're only eligible for 16 weeks of benefits. So if you collect 8 weeks of CERB benefits, then get 3 months' pay in lieu of notice...then what? If you were looking at an EI-type system, you might say something like "The government gets its 8 weeks' back, but if you're still out of work in a month, then you can apply again and get your full four months at that time.
Pretty tough to streamline that kind of calculation. So maybe this is one of those areas where we're prioritizing simplicity.
Maybe not. If the government isn't asking employees for CERB benefits back after getting wrongful dismissal damages, there's a secondary question as to whether or not the employer is entitled to treat the benefit as 'mitigation earnings'.
Damages are guided by the compensation and mitigation principles: They're supposed to put you in the position you would have occupied had the contract been complied with.
At a glance, a simple "but-for" analysis suggests that CERB benefits are received by virtue of the loss of employment, and therefore qualify as mitigation earnings. But there are certain cases where the courts have deviated from a simple but-for analysis, dealing with "collateral benefits".
CERB almost certainly creates a collateral benefit, which may or may not be deducted from the employer's liabilities as mitigation earnings. The question is whether or not the purpose of the benefit is to indemnify the employee for the type of loss resulting from the breach.
And I can certainly go either way, but I lean towards treating it as non-deductible - or at least as not always deductible.
Imagine, if you will, a scenario where an employee entitled only to three months of reasonable notice permanently lost their job, for COVID-related reasons, on March 16, 2020. Assume that this individual is EI-eligible, and will remain out of work at least until the end of the EI benefit period on any formulation.
So...the "no breach" scenario here is that the employer would have continued to employ the individual until June 16, 2020, at full compensation. THEN, this person would have been entitled to 16 weeks of CERB benefits. And then, to their full EI benefit period. In this permutation, you can see that even the simple 'but-for' test isn't necessarily satisfied: The employer is saying that this employee, who in the 'no breach' would have gotten full compensation over the notice period AND 16 weeks of CERB benefits, should lose the benefit of 13 weeks of CERB benefits.
That shouldn't fly.
On the other hand, in cases of longer notice periods, that would extend past the end of the CERB benefit period altogether, the 'but-for' test will be satisfied, and you get into the 'purpose'. If CERB is really an income replacement benefit, then maybe it could be deductible in certain cases. But I'm not sure it is. The low entry thresholds, streamlined benefit amount, and shorter benefit period...and heck, even the name of the program...all suggest that it's more about creating a broad-brush benefit to help large numbers of people through temporary financial hardship as the result of job loss. It's not about providing people with individualized income replacement tied to their circumstances and income, and it is entirely plausible for a CERB benefit to be higher than the income lost by an employee in the first place. A person who loses a 10-hour/week minimum wage job as a result of COVID will see their income triple on CERB.
In other words, the potential for windfalls is baked into the CERB program.
And employers have their own emergency programs available. Interest-free credit with forgivable loans, the CEWS program, and other measures designed to actively discourage employers from terminating employment relationships. To give the CERB windfall to the employer instead - and bear in mind that there is a very large class of cases of COVID layoffs where this would be at least theoretically relevant - would be to reward the employer conduct that the government has expressly said they're trying to create incentives against.
And here's the real catch - the lawyer's equivalent of the 'three body problem'. Where an individual is entitled to income replacement benefits from both the government and from an employer, the question is who gets the benefit of the duplication?
The government may or may not take the position that an overpayment has arisen. The employer may take the position that its liabilities are reduced by the government's contribution. And the employee may take the position that he or she gets to keep both payments.
But from the employee's perspective, the problem is this: If you discount your settlement as against your employer on the basis of an assumption that they may get a reduction because of CERB...and then the government comes knocking on your door saying "The payment from your employer created an overpayment, and now we want the CERB benefits back"...then instead of double-recovery of the CERB amount, you're losing recovery of the CERB amount altogether.
And these overpayments...I don't expect we'll start to see any meaningful resolution of any of them until next year...and given that there have been over 8 million applicants for CERB, it's fair to say that resolutions of all these issues will take multiple years moving forward.
This stuff is going to be messy.
*****
Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
Employee gets dismissed without notice. She sues her employer, but in the mean time, she applies for EI benefits - after all, she needs the cash. When she settles her wrongful dismissal claim, Service Canada looks at the income as creating an 'overpayment' - she may have to repay some or all of the EI benefits she received.
I had assumed that the same would be true of CERB. Now that I'm looking more closely, I'm not so sure.
You probably know that you can't get CERB benefits if you're making more than $1000 in the eligibility period, right? Well, at the margins, there's always a question of what kind of income gets included in that. So we look at the definition of 'income' for the purpose of the eligibility exclusion at section 6(1)(b) of the CERB Act...and it turns out that it's really narrow.
they do not receive, in respect of the consecutive days on which they have ceased working,
- (i) subject to the regulations, income from employment or self-employment,
- (ii) benefits, as defined in subsection 2(1) of the Employment Insurance Act,
- (iii) allowances, money or other benefits paid to the worker under a provincial plan because of pregnancy or in respect of the care by the worker of one or more of their new-born children or one or more children placed with them for the purpose of adoption, or
- (iv) any other income that is prescribed by regulation.
The Regulations don't have any impact right now. So we're really just talking about three types of income for the purposes of this exclusion: Employment/self-employment income; EI benefits; or surrogacy/foster care allowances.
To understand how narrow this is, consider some of the other areas where people might get an income stream: Capital gains; dividends; spousal support; inheritances; trust payments; social assistance; pensions; disability benefits; gifts; and others. None of these income sources will impact eligibility for CERB.
So the question of the hour: Does it include pay in lieu of notice?
A Few Distinctions
I recently published a paper in the Alberta Law Review that turned heavily on considerations of exactly what wrongful dismissal damages are. Some of the earliest cases on the subject were tax cases from the 1970s, considering whether such damages (or settlements of damage claims) are employment income.
The answer was 'no' - but following amendments in 1978, they became taxable as retiring allowances.
However, that's a treatment for 'common law' pay in lieu of notice only. For statutory pay in lieu of notice, and for most contractual termination payments, that's probably employment income.
So when I'm talking about 'pay in lieu' here, I'm talking specifically about pay in lieu of common law reasonable notice. Other treatments might apply to other similar-looking income.
The EI Framework
EI creates a framework for a clawback based on "earnings", or "earnings from employment", during the benefit period. You might think that this language makes me ask a similar question about EI clawbacks, but there are a few sections in the EI Act that expressly speak to overpayments resulting from payment of wrongful dismissal damages.
And when the employer pays out a wrongful dismissal settlement or judgment to somebody who has received EI benefits, the statute confers liability on both the employee and the employer for the overpayment.
Most of us, looking at the CERB framework, expected something similar.
CERB
Yet we didn't get it. There's nothing in CERB establishing employer liability for overpayments, nothing speaking to wrongful dismissal damages or pay in lieu of common law notice, nothing suggesting that the government will want its money back following a payout of a severance-type package.
On the strict language, and based on careful review of the underlying legal theory, I'd tend to take the position that common law pay in lieu of notice does not impact eligibility for CERB benefits, and does not result in an overpayment. (On express contractual severance payments or statutory termination pay, that's a tougher question. Also, more nuanced treatments might exist in cases of salary continuance.)
The government's online FAQs support this conclusion: "A severance payment does not impact an individual’s eligibility for the Canada Emergency Response Benefit."
But we already know that the government will be doing back-end eligibility verification at tax time, and given that the dust hasn't settled on the roll-out of these programs, there's further consideration warranted as to whether or not this was a policy decision by the government, or an error that they may correct - and then go after the benefits they've paid, with interest.
Was It Intentional?
The fact that the FAQs themselves suggest that severance (albeit lacking in definition) doesn't affect eligibility...suggests that it's not something that the government has just missed. It's not determinative, though. The FAQs aren't a binding authority, and it's entirely plausible that there's a communication disconnect within the bureaucracy.
Yet the contemporaneous CEWS language had express language dealing with retiring allowances, in a way that suggests an awareness that they aren't generally lumped in with wages or other employment compensation.
However, it raises a serious question as to why. Why would the government say to an employee receiving a (potentially large) severance package, "Here's an emergency benefit anyways"?
The answer may be tied to the simplicity of the program. Many of the features of CERB are tied to streamlining the program to get loads of cheques out the door as quickly as possible. It has a benefit period much shorter than EI, and can be followed by EI benefits.
But the way that EI deals with these packages can be complicated, involving not just overpayments but also suspension of the running of benefit periods. Ultimately, if somebody is out of work for a long period of time, the EI overpayment comes out in the wash - they still get their full EI benefit claim, and full pay in lieu of notice. But the processing and timing of benefit claims gets elaborate.
With CERB, it's only available for a finite period in the first place, and you're only eligible for 16 weeks of benefits. So if you collect 8 weeks of CERB benefits, then get 3 months' pay in lieu of notice...then what? If you were looking at an EI-type system, you might say something like "The government gets its 8 weeks' back, but if you're still out of work in a month, then you can apply again and get your full four months at that time.
Pretty tough to streamline that kind of calculation. So maybe this is one of those areas where we're prioritizing simplicity.
So do employees get a windfall?
Maybe not. If the government isn't asking employees for CERB benefits back after getting wrongful dismissal damages, there's a secondary question as to whether or not the employer is entitled to treat the benefit as 'mitigation earnings'.
Damages are guided by the compensation and mitigation principles: They're supposed to put you in the position you would have occupied had the contract been complied with.
At a glance, a simple "but-for" analysis suggests that CERB benefits are received by virtue of the loss of employment, and therefore qualify as mitigation earnings. But there are certain cases where the courts have deviated from a simple but-for analysis, dealing with "collateral benefits".
CERB almost certainly creates a collateral benefit, which may or may not be deducted from the employer's liabilities as mitigation earnings. The question is whether or not the purpose of the benefit is to indemnify the employee for the type of loss resulting from the breach.
And I can certainly go either way, but I lean towards treating it as non-deductible - or at least as not always deductible.
Imagine, if you will, a scenario where an employee entitled only to three months of reasonable notice permanently lost their job, for COVID-related reasons, on March 16, 2020. Assume that this individual is EI-eligible, and will remain out of work at least until the end of the EI benefit period on any formulation.
So...the "no breach" scenario here is that the employer would have continued to employ the individual until June 16, 2020, at full compensation. THEN, this person would have been entitled to 16 weeks of CERB benefits. And then, to their full EI benefit period. In this permutation, you can see that even the simple 'but-for' test isn't necessarily satisfied: The employer is saying that this employee, who in the 'no breach' would have gotten full compensation over the notice period AND 16 weeks of CERB benefits, should lose the benefit of 13 weeks of CERB benefits.
That shouldn't fly.
On the other hand, in cases of longer notice periods, that would extend past the end of the CERB benefit period altogether, the 'but-for' test will be satisfied, and you get into the 'purpose'. If CERB is really an income replacement benefit, then maybe it could be deductible in certain cases. But I'm not sure it is. The low entry thresholds, streamlined benefit amount, and shorter benefit period...and heck, even the name of the program...all suggest that it's more about creating a broad-brush benefit to help large numbers of people through temporary financial hardship as the result of job loss. It's not about providing people with individualized income replacement tied to their circumstances and income, and it is entirely plausible for a CERB benefit to be higher than the income lost by an employee in the first place. A person who loses a 10-hour/week minimum wage job as a result of COVID will see their income triple on CERB.
In other words, the potential for windfalls is baked into the CERB program.
And employers have their own emergency programs available. Interest-free credit with forgivable loans, the CEWS program, and other measures designed to actively discourage employers from terminating employment relationships. To give the CERB windfall to the employer instead - and bear in mind that there is a very large class of cases of COVID layoffs where this would be at least theoretically relevant - would be to reward the employer conduct that the government has expressly said they're trying to create incentives against.
When Will We Find Out?
And here's the real catch - the lawyer's equivalent of the 'three body problem'. Where an individual is entitled to income replacement benefits from both the government and from an employer, the question is who gets the benefit of the duplication?
The government may or may not take the position that an overpayment has arisen. The employer may take the position that its liabilities are reduced by the government's contribution. And the employee may take the position that he or she gets to keep both payments.
But from the employee's perspective, the problem is this: If you discount your settlement as against your employer on the basis of an assumption that they may get a reduction because of CERB...and then the government comes knocking on your door saying "The payment from your employer created an overpayment, and now we want the CERB benefits back"...then instead of double-recovery of the CERB amount, you're losing recovery of the CERB amount altogether.
And these overpayments...I don't expect we'll start to see any meaningful resolution of any of them until next year...and given that there have been over 8 million applicants for CERB, it's fair to say that resolutions of all these issues will take multiple years moving forward.
This stuff is going to be messy.
*****
Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
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