Disability, Pension and Severance Pay

A significant number of employees in Canada receive disability coverage and/or pension payments as a component of their employment benefits.  Disability coverage will often provide the either partial or full coverage of salary while employees are unable to work for health reasons. Pension plans, for their part, provide opportunities to trigger income coverage after a certain number of years of service and/or age thresholds.

Since employees are often on disability leave for significant periods of time, it is common for employees to find that their employment has been terminated while still on disability leave.  Similarly, employees will often have the option to draw on a pension at the time of the termination of their employment.

Whether an employee is entitled to benefit from both severance pay and disability/pension in these cases is a common and complex matter for employment lawyers in Canada and has accordingly been the subject of significant attention by the courts in recent years.

In short, the following factors will significantly determine whether an employee is entitled to both disability and/or pension and termination payments.  These include:

• Whether the employee is contributing to the pension or disability plan
  • When an employee contributes to a pension plan directly and/or indirectly, they will almost certainly be entitled to both the pension and the termination payments
  • Similarly, when an employee contributes to disability coverage (normally through payroll deductions), they are more likely to be deemed to be as entitled to both disability and termination payments

• The purpose of the plan
  • If a plan is intended as coverage for wage losses, as opposed to an additional benefit, it is more likely that any amounts will be deducted from termination pay.  For example, pension benefits are not considered a contribution on the part of the employer to cover losses stemming from the termination of employment

A significant determining factor of whether an employee is entitled to disability/pension and termination pay will depend on whether the denial of the benefit will result in the employer being put in a better position than they had been had the employee not had the disability coverage and/or pension.

A key factor is therefore to determine the underlying purpose of a disability and/or pension plan and to ensure that it is executed in a manner that takes into account the possibility of a termination of employment.