Howard Levitt: Leaving pension benefits out of severance packages is a costly miscalculation

Severance is not about salary alone, writes Howard Levitt, and it never was. Photo by Handout/Canadian Payroll Association/Postmedia files

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Getting fired is not just about losing a paycheque. It is about losing an entire compensation ecosystem that many employees — and, conveniently, more than a few employers — forget exists.

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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.

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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.

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Yet time and again, employees and their lawyers leave substantial sums on the table by focusing exclusively on salary and ignoring benefits that can be worth far more. Employers, for their part, are delighted to let the oversight remain just that.

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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.

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

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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.

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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.

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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.

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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.

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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.

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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.