In a decision that will likely fly under the radar, the Federal Court of Appeal in Canada (Attorney General) v. Warren, 2012 FCA 74 (CanLII) considered the “treatment” of monies paid to an employee in settlement of a grievance.
This was an application for judicial review of the decision of an Umpire under the Employment Insurance Act upholding the decision of a Board of Referees which concluded that the sum of $12,000, received by Ms. Warren, constituted “compensation for relinquishment of a right to reinstatement”. The Court allowed the application for judicial review.
Following an incident in the workplace, Warren applied for benefits under the insurance plan and was denied by the employer. Ms. Warren then applied for and received medical employment insurance benefits from October 25, 2009 until March 6, 2010 and then regular employment insurance benefits. Ms. Warren’s union filed a grievance following the employer’s denial of the grievance and the grievance was fully and finally settled as follows:
Pursuant to the agreement, the employer was required to pay to the respondent the all-inclusive sum of $12,000, less any statutory deductions, and to provide a neutral letter of reference. The respondent was required to resign her employment, return her employer’s property, withdraw her grievance and release her employer from any liability with respect to any claims that may arise regarding the employment or the cessation of the employment. The respondent subsequently executed a release (containing the customary non-admission of liability clause) on February 2, 2010.
When Ms. Warren notified the Employment Insurance Commission of the settlement, and specifically that she had received $9,600 (net of taxes) from her employer, the Commission deducted the $12,000 (gross) from the benefits she had received and concluded that there was an overpayment to Ms. Warren of $1,536 which had to be remitted.
Unless the payment could be characterized as compensation for relinquishment of the right to reinstatement, it was properly allocated under the provisions of the Employment Insurance Act and theEmployment Insurance Regulations. The leading case is Canada v. Plasse and Meechan v. Canada (Attorney General) which the Court
The legal principle to be taken from these authorities was succinctly stated in the decision of this Court in Attorney General of Canada v. Cantin, 2008 FCA 192 (CanLII), 2008 FCA 192 (Cantin). There, the Court stated that, in federal law, the right to reinstatement is an employee’s right to resume his or her position following a wrongful dismissal. In such circumstances, compensation to relinquish the right to reinstatement following a wrongful dismissal does not constitute earnings within the meaning of the Act and the Regulations (Cantin, para. 33). However, wrongful dismissal is a prerequisite to a right to reinstatement.
Ms. Warren had not been terminated and, as such, the payment received by Ms. Warren did not constitute compensation for relinquishment of a right to be reinstated.
How money is characterized for tax and employment insurance purposes is an important consideration in many settlements. But simply calling something “compensation to relinquish the right to reinstatement” doesn’t make it so. Understanding how these words have been interpreted is critical to ensuring that the settlement achieves the desired ends (closure and finality) while withstanding scrutiny and challenge.