Employees in Canada are usually entitled to receive reasonable notice of termination or pay in lieu of notice, unless fired for cause. But if the employees receive pension or sick leave payments during the notice period, are they entitled to both their regular salary in lieu of notice and such pension or sick leave payments? Should the latter amounts be deducted from the salary otherwise owed by the employer in respect of the notice period?
Sometimes, depending on the circumstances, a dismissed employee may be entitled to draw on their pension immediately upon dismissal. This might start during the period for which they would otherwise receive pay in lieu of notice. In other cases, an employee may be terminated while on sick leave and already in receipt of short or long term disability benefits. This might seem like double recovery. Can the employee legitimately demand that the employer put them in a better situation than they would have been in had their employment not been terminated (at least for that notice period)?
The legal answer is: it depends.
The issue used to be quite complex. The question of who had paid for the pension or disability insurance plan was central to the analysis (see for example: Sylvester v. British Columbia; Sills v. Children's Aid Society of the City of Belleville; McNamara v. Alexander Centre Industries Ltd.) This is still a factor, but in 2013, the Supreme Court of Canada stated that it should no longer be given much weight (See IBM Canada Ltd v. Waterman). The new rules are easier to apply.
The Short Answers
There are always going to be exceptions, but the short answers to our questions are as follows.
Pension benefits: As a general rule, when an employee has directly or indirectly contributed to a pension plan, the employee is entitled to both the pension and pay in lieu of notice. This is because pension benefits are a type of retirement saving. They do not constitute an indemnity, due to unemployment (wage loss coverage).
Disability benefits: Conversely, as a general rule, short or long term sick leave payments received by a dismissed employee during the reasonable notice period would reduce the pay in lieu of notice owed by the employer (see, in addition to Waterman, Morris v. ACL Services Ltd.; Lethbridge Industries Ltd v Alberta (Human Rights Commission)). This is because disability benefits are intended to act as a wage replacement, so it's for essentially the same purpose as pay in lieu of notice.
A Principle … and Exceptions
The basic principles that apply are as follows. It is a general rule of the law of contracts in Canada that, except in special circumstances, where a contract is breached, damages are awarded to place the innocent party in the economic position they would have been in had the contract been performed. Damages are restorative in nature and are measured by the actual loss suffered. This is also generally true of damages for wrongful dismissal, because that is considered to involve a breach of the employment contract. The employee is to be "made whole" by being awarded pay in lieu of notice for a "reasonable" notice period. Sometimes, a source other than the damages payable by the employer ameliorates the loss suffered by the employee as a result of the breach of contract. In some cases, the employer can get "credit" for those advantages, in other cases, it is not possible.
One example of a case where "double recovery" by the employee is allowed is when the "private insurance exception" applies.
Private Insurance Exception
This exception provides that benefits received by an employee through private insurance (or through other benefits analogous to private insurance) are not deductible from the amount otherwise payable by the employer to the employee.
The nature and purpose of the benefit can help decide whether they fall under the private insurance exception. The fact that the benefit constitutes an indemnity for the sort of loss caused by the breach is highly relevant. If the benefit is not paid to compensate the employee for the sort of monetary loss suffered (here: loss of salary), the arguments in favour of deducting it from the pay in lieu of notice are weaker. Conversely, the more closely the benefit constitutes an indemnity against the loss caused by the breach (here: loss of salary), the stronger the case for deduction.
When wondering if deducting pension benefits or disability benefits from pay in lieu of notice, an employer should look at the nature and purpose of the plan. As a general rule, pension benefits will often be "non-indemnity" in nature, and thus will not reduce the pay in lieu of notice the employer must pay. However, sick leave benefits will generally be "indemnity" in nature, thereby offsetting the employer's severance obligation.