8 Types of Payments Not Subject to Employment Insurance Clawback
This is a common question from terminated employees considering suing: “should I apply for Employment Insurance?” When dealing with a straightforward wrongful dismissal case, it is conventional wisdom among many lawyers to say “no”.
A normal wrongful dismissal settlement or award is considered “earnings” which are deemed to be earned after employment ended. If that employee was paid EI benefits during that time, they will be faced with the frustrating process of paying back that money to EI.
But a wrongful dismissal claim is not always just for wrongful dismissal. Sometimes, a termination will bring ongoing grievances to a head, or involve allegations of bad faith, discrimination, unpaid overtime, etc.
Both employers and employees alike should be mindful of these issues when drafting minutes of settlement, as thoughtfully apportioned settlement funds can lead to efficiencies for both sides.
Here are 8 types of payments that have been held to be immune from EI clawback:
1. Legal Fees
Legal fees awarded or apportioned from a settlement are subject neither to tax nor to EI clawback. It is good practice, if possible, for the plaintiff to apportion the full amount of the legal fees out of the settlement funds (even amounts already paid) in order to reduce this burden.
2. Damages for emotional distress, health, reputation and human rights violations
In some wrongful dismissal cases, egregious employer conduct may lead to a legitimate claim for special damages. Such damages are not considered lost wages, but rather, compensation for injury to dignity, psychological trauma, damage to health (and the associated medical bills), public reputation, etc. Such payments may not be subject to EI clawback, depending on how they are characterized.
3. Payment for unpaid overtime, banked lieu time, or vacation
Post-termination payments for unpaid overtime, lieu time, or vacation may not be subject to EI clawback. Although those payments are “earnings”, they are typically found to be earned during employment, i.e., before the employee received any benefits from EI.
4. Payment for accrued but unpaid bonus, commissions or royalties
It is common for employers to terminate employees just before the payout of a yearly bonus. If the employee subsequently makes a claim for payment of that bonus, the portion of the bonus that was accrued but unpaid at the time of termination may not be subject to EI clawback. The rationale is the same as the prior example – the entitlement to the bonus arose during employment, not after.
5. Waiving rights to reinstatement
Reinstatement is a right that arises under statute – among others, the Human Rights Code, the Canada Labour Code, and the reprisal provisions of the Occupational Health and Safety Act and the Employment Standards Act. This payment will be taxable, but is typically not subject to EI clawback.
6. Other potentially clawback-resistant payments in a settlement
EI clawback is determined on a case-by-case basis. It is possible that certain other settlement payments would be immune from EI repayment, such as:
a. Payment for an agreement to waive intellectual property rights
b. Payment for a covenant of confidentiality/non-disparagement
c. Payment for a covenant to honour a non-solicitation/non-competition covenant