Clarity on CERB? First Court of Appeal decision on deductibility

Employers and employees across Canada were impacted by the COVID-19 pandemic. Employers had to layoff workers. Employees were unable to work due to school closures or caring for loved ones. To help mitigate some of the financial hardships caused by the pandemic, the Canadian government offered a number of benefits and subsidies, including the Canada Economic Response Benefit ("CERB"). CERB provided temporary financial compensation to employees who were unable to work due to reasons related to COVID-19, including employees terminated in relation to the pandemic.

Although CERB ended over a year ago, in October 2021, the issue of how it impacted employees' termination entitlements has continued to be a live issue. Specifically, courts across Canada have grappled with and reached differently conclusions on whether CERB should be deducted from an employee's wrongful dismissal damages. Would it be unfair for the employer to benefit from CERB by having to pay less damages if it is deducted? Or would not deducting it result in a windfall to the employee?

These tricky questions were considered in the recent British Columbia Court of Appeal decision in Yates v. Langley Motor Sport Centre Ltd., 2022 BCCA 398. This is the first known appellate decision on the issue.

Facts

The fact pattern in this case is characteristic of many that stem from the early days of the pandemic. The employee was placed on temporary layoff in March 2020. Between March 2020 to August 30, 2020, the employee received $10,000 under CERB. She was not re-instated by August 30, 2020, when the temporary measures allowing for extended layoffs ended in BC. Thus, by operation of law, her employment was deemed terminated retroactive to the start of her layoff in March 2020.

Following her termination, she brought a wrongful dismissal action against her employer. One of the issues was whether the $10,000 she received under CERB should be deducted from her damages for wrongful dismissal.

Trial Decision – 2021 BCSC 2175

The trial judge held the employee was entitled to 5 months' notice or $25,000 in wrongful dismissal damages. She also held the $10,000 should be deducted from the employee's damages.

In reaching this conclusion, the trial judge emphasized there was a "compensating advantage" issue. A compensating advantage arises where an individual receives an advantage that either (a) would not have occurred but for the breach of contract (a.k.a. the termination), or (b) was intended to indemnify the individual for the sort of loss resulting from the breach. Typically, a compensating advantage will be deducted from the damages award, with some exceptions.

In this case, the trial judge found that the CERB payments would not have been payable to the employee if she had not been terminated from employment and that it was a benefit intended by the Government to indemnify for the loss of regular salary. As there was no evidence that the employee would be required to repay the benefit, the trial judge held the CERB benefits should be deducted from the employee's award of damages to avoid a windfall to the employee.

Court of Appeal Decision – 2022 BCCA 398

The Court of Appeal disagreed with the trial judge, holding the CERB benefit should not be deducted.

The Court of Appeal agreed CERB was a compensating advantage, but for different reasons. The Court held it was wrong to say the employee would not have received the benefit but for her termination, as she received it because she was laid off or furloughed. However, the benefit was clearly intended to indemnify her for lost wages, which was the kind of loss resulting from her termination.

The Court of Appeal held that the trial judge further erred by not grappling with the broader policy considerations that are applicable when considering when a benefit should or should not be deducted: "punishment, deterrence, and the provision of socially responsible behaviour". The Court went on to conclude that the policy considerations weigh in favour of the benefit not being deductible, as follow:

1. It seems wrong for the employer who breached the employment contract to effectively enjoy a windfall from an income support program designed to benefit workers impacted by the COVID-19 pandemic. It seems better to reflect the intention of Parliament for the windfall to go to the employee.
2. Concerns of equal treatment weigh in favour of deductibility. The effective date of a laid of employee's termination could impact when the period of notice runs from and thus whether CERB payments are or are not deductible. Employees who were not recalled from layoff during the allowed layoff period would have their termination date deemed the date of their initial temporary layoff, whereas employees terminated outright during a layoff would have their termination date be the actual date of termination.
3. Making it not deductible remove the undesirable incentive for an employer to manipulate matters by timing their termination of an employee on temporary layoff so that CERB payments would be deductible.
4. It is in the best interests of society for employers to provide laid-off employees with the required notice of termination and recipients of CERB should be entitled to their full damages.
5. CERB was intended to apply broadly, quickly, and simply. That would be threatened if CERB must be deducted and then the actual deduction has to await until the realization of any income tax impacts.
6. Overall, "CERB was an emergency measure delivering financial aid during the early weeks and months of an unprecedented global pandemic. The program's goal was to mitigate harm to individuals in a moment of great uncertainty. CERB payments notwithstanding, many people lost their livelihoods as a result of the pandemic. It strikes me as out of step with that reality to conclude that the combination of CERB and damages awards leaves individuals "better off" after their employment was terminated than before."

Takeaways:

Subject to any further appeal or appellate decisions, the issue of CERB deductibility may be settled. CERB should not be deducted from wrongful dismissal damages. For employees, this means that they may not have to worry about accounting to their employer for any CERB payment they received. For employers trying to limit exposure to wrongful dismissal damages, focusing on other issues, such as mitigation, may be a better use of time and resources.