Leaving pension benefits out of severance packages is a costly miscalculation

When an employee is terminated without cause, the law does not simply award weeks of salary and send everyone on their way. The purpose of notice or severance is to place the employee in the identical financial position they would have occupied had they continued working through a reasonable notice period. That principle is simple. Its implications are not.

Reasonable notice is not a blunt instrument measured only in weeks of base pay. It encompasses everything the employee would have earned or enjoyed: health and dental benefits, bonuses, commissions, stock plans, car allowances, pension accrual — the works. If the notice period is 12 months, the entitlement is not 12 months of salary. It is 12 months of employment, monetized.

The governing principle is settled law: benefit plans must continue during the notice period or be compensated in cash. Bonuses that would have vested during the notice period may be payable. Commissions must be included. Pension contributions must be addressed. Anything else is a legal shortcut — and a risky one.

No benefit is more misunderstood, or more valuable, than the company pension.

Pensions are not an afterthought. For long-service employees, they are often the most significant asset they own outside their home. Both employment standards legislation and the common law protect pension entitlements during the notice period. But statutory minimums are only the floor.

The common law goes further, requiring employers to compensate dismissed employees for the pension value they would have accrued had they worked through the full reasonable notice period.

In practical terms, if an employee is owed 12 months' notice, the severance must reflect not only 12 months of salary, but also 12 months of pension growth.

For defined contribution plans, that usually means missed employer contributions plus investment growth. For defined benefit plans, the exposure can be far larger — and dramatically more expensive. Calculating the present value of an additional year or two of credited service often requires an actuary, and the resulting number can dwarf the employee's salary.

This becomes explosive when pension plans contain thresholds — the so-called "magic numbers" — that unlock unreduced retirement benefits once an employee reaches a certain age-plus-service combination.

Consider a common scenario: a pension plan allows an employee to retire with an unreduced pension once age plus years of service equals 90. A 63-year-old employee with 27 years of service reaches that threshold. A 62-year-old with the same service does not.

That one-year difference can translate into hundreds of thousands of dollars over a lifetime.

The first employee can retire comfortably. The second is stuck in limbo — close enough to taste it but not to claim it. Until the next birthday or service anniversary, that employee is uniquely vulnerable. A termination at the wrong moment can wipe out decades of accumulated value.

Some employers understand this arithmetic all too well. The temptation to terminate just before a pension milestone is obvious: cut costs by preventing a costly benefit from crystallizing. The law does not reward clever timing.

Ontario courts have been clear that where an employee is approaching a major pension entitlement, that fact cannot be ignored when determining reasonable notice.

One good example is Arnone v. Best Theratronics Ltd., in which the employee, a 53-year-old manager with 31 years of service, was only 16.8 months away from qualifying for an unreduced pension. The employer provided only minimum termination pay and showed him the door. He sued.

The judge was unimpressed. They found that ignoring the imminent pension milestone would be unfair and unrealistic. The result: damages equal to the salary he would have earned during the 16.8 months required to reach pension eligibility, plus an additional lump sum to compensate for the permanent enhancement in pension value that he lost.

In effect, the court bridged him to his pension date and paid the pension difference in cash.

The message was unmistakable. If an employee is only months away from a major entitlement, reasonable notice may extend right to that milestone — regardless of how inconvenient it is for the employer's balance sheet.

The lesson? Severance is not about salary alone. It never was.

Employees nearing retirement or service thresholds must scrutinize their benefits, particularly pensions, with the same intensity they apply to base pay. Employers who fail to do so invite litigation — and will lose. A few extra weeks of salary are trivial compared to the pension value that can quietly slip away if benefits are ignored.

A proper severance package looks at the whole picture. Anything less is not only unfair; it is legally dangerous.

Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers with offices in Ontario and Alberta, and British Columbia. He practices employment law in eight provinces and is the author of six books, including the Law of Dismissal in Canada. Jack Powles is an associate at Levitt LLP.