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BREAKING: B.C. Court of Appeal Rules CERB NOT Deducted from Wrongful Dismissal Damages

For the first time, an appeals court in Canada has ruled on what had previously been an uncertain and controversial legal principle – whether CERB benefits received by an employee terminated without notice ought to be deducted from their benefits.  The Court of Appeal for British Columbia has weighed in, overturning the trial court decision and ruling that an employee’s compensation is not reduced by the amount of CERB benefits received during the notice period.  While there are certainly merits to this outcome, there are also compelling arguments that it was decided incorrectly.

In Yates v. Langley Motor Sport Centre Ltd., 2022 BCCA 398 the Employee was put on a temporary layoff in accordance with the B.C. Employment Standards Act near the beginning of the COVID-19 pandemic.  This was of course a time when public health restrictions made many businesses, including the Hyundai dealership that employed the Plaintiff, unable to operate either by reason of direct shut-down or lack of customers.  As the provincial government amended the legislation to extend temporary layoff periods – meaning the layoff did not become a deemed termination of employment as quickly as it normally would – the Employee’s layoff extended accordingly.  She was able to collect $10,000.00 in CERB benefits, and to her credit, she actively sought information from her employer about prospects of returning to work.

Once her lay-off became a termination without just cause, the Employee sought wrongful dismissal damages, as well as aggravated and punitive damages against the Employer.  The trial court set wrongful dismissal damages at five months’ pay, equal to $25,000.00.  No issue was taken with that assessment.  However, it ruled that the Employee’s CERB benefits needed to be deducted since it constituted compensation during the termination notice period – ie. the period of five months’ notice of termination (or pay in lieu thereof) that the Employee was owed pursuant to the common law.  This was consistent with the bulk of awards considering the same legal issue.  The claims for aggravated and punitive damages were denied.

The Employee partially appealed the trial court’s decision, seeking to have the ruling reversed on the issues of CERB deduction, as well as aggravated and punitive damages.

But let’s take a step back for a second.  Why would CERB benefits be deducted from a wrongful dismissal award for damages?  Well, under the common law, compensation for notice of termination is really compensating for breach of a contract – in this case an employment contract.  Remember, every employment relationship is a contractual one, whether or not it is put in writing.  The law remedies breached contracts by placing the affected party in the position it would have been had the contract not been breached.  An employee who is owed five months’ reasonable notice of termination is therefore not entitled to receive greater compensation than they would have had if they remained in the job for five months.  If CERB benefits are not deducted, then the Employee is being awarded the pay they would have received for working for five months, plus the $10,000.00 that they received for not being able to work.

For another example, take Employment Insurance benefits.  An employee who loses their job may be eligible to collect EI, while they wait for their wrongful dismissal claim to be litigated.  If their claim is successful, the Employment Insurance Act requires a “claw-back” of EI benefits received during the notice period so that the employee is not, in effect, receiving a windfall.  There is no such repayment obligation for CERB (at least not yet…).

In the case at hand, the Court of Appeal assessed the CERB issue consistent with case law regarding “compensating advantage”.  A compensating advantage is essentially when a plaintiff receives a benefit that would over-compensate them beyond their actual loss, and that benefit is sufficiently connected to the employer’s breach of the employment contract.  Compensating advantages would reduce the damages awarded proportionately, save for private insurance benefits or charitable gifts.  However, the Employee urged the Court of Appeal to consider this instance as another exception, largely based on “broader policy considerations”.  The Court agreed.

First, the Court said that:

[48] … as a matter of overall impression, it seems wrong for a defendant employer who has breached the employment contract with the plaintiff to enjoy, effectively, a windfall from an income support program designed to benefit workers impacted by the COVID-19 pandemic. If a windfall is to result, it seems to better reflect the intention of Parliament that it go to the worker.

With respect, this seems inconsistent with the common law of damages for terminations of employment.  As mentioned, an employee who received government assistance through EI has to repay their EI benefits if they receive wrongful dismissal compensation.  That does not occur with CERB.  Secondly, wrongful dismissal damages are reduced when an employee successfully mitigates their losses through seeking out and obtaining alternate employment during the notice period.  How can it be right for an employer to “enjoy a windfall” from the employee’s mitigation efforts, but wrong to place the employee in the position they would have been but for the breach of contract by deducting the CERB amount?

The Court went on to decide that:

[55]      In the end, what tips the balance against deductibility in my view are the policy considerations of the desirability of equal treatment of those in similar situations, the possibility of providing incentives for socially desirable conduct and the need for clear rules that are easy to apply…

The Court noted that under B.C.’s Employment Standards Act, the Employee’s termination became effective retroactive to the first day of the layoff once the temporary layoff period was exceeded and therefore the CERB benefits were received during the notice period.  However, if they were terminated prior to the end of the temporary layoff period, the termination date would not be retroactive and the CERB benefits would not have been received during the notice period and there would be no doubt that they would not be deducted from wrongful dismissal damages.  The desirability of equal treatment of those in similar situations, according to this Court, therefore favoured not deducting CERB.

The Court also identified an incentive for socially responsible conduct, insofar as “non-deductibility would remove the incentive for an employer to manipulate matters by the timing of their termination of an employee on temporary layoff by allowing the temporary layoff period to expire.”  Respectfully, there is no inherent benefit to an employer of waiting for a temporary layoff period to expire rather than terminate the employee, other than, conceivably, to gain the benefit of a CERB deduction.  Remember that CERB was only a temporary measure and is no longer available.  But further, just because CERB is non-deductible does not mean that employers will terminate their employees prior to the expiry of a temporary layoff (the benefit of which to either employer or employee escapes this writer).  On a basic level, this analysis loses track of the key principle to remedying a breach of contract.  It is to put the aggrieved party in the position they would have been but for the breach.  It is not to punish the party breaching.  This leads to a final point. 

Aggravated and punitive damages are available to punish the offending party to and to deter similar future misconduct.  The Court of Appeal did not disrupt the Trial Court’s decision not to award aggravated or punitive damages.  Granted, the test for aggravated and punitive damages are very difficult to fulfill, but remedies for breach of contract are meant to be compensatory, and not punitive.

Of course, it is only right for employees to be supported when they lose their jobs for reasons beyond their control.  And there is certainly some appeal to the reasoning that employers who breach the employment contract ought not have the benefit of a social assistance program meant to help get workers through the pandemic.  But it is our respectful and considered view that this outcome is out of step with established law and the Court made its ruling based on reasons that are not entirely logical or supported.

But for now, employers ought to proceed with caution and the expectation that employees who were terminated will be entitled to full compensation for the common law notice period, even if they received CERB benefits during it.

This is clearly a tricky legal issue.  The professionals at CCPartners advise employers on their obligations to terminated employees regularly, and help you understand your potential liability and even negotiate a reasonable resolution.

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