Any severance award for the wrongful dismissal of an employee, falls into the category of 'earnings' that are deemed to be earned after the termination of employment. If an employee received EI benefits following termination, they will be faced with the aggravating process of paying back that money to EI upon receiving an award for wrongful dismissal damages.
But if part of the wrongful dismissal settlement includes overtime pay or special damages, an employment lawyer can structure the settlement in a way that would avoid unnecessary clawbacks.
Both employers and employees should keep these issues in mind when drafting settlement documents, in order to facilitate an efficient settlement for both sides.
7 Ways to Avoid Unnecessary EI Clawbacks
Offer payment for unpaid overtime, banked lieu time and vacation.
Overtime and vacation are taxable earnings, but they are usually considered to be earned during employment, so they may not be subject to EI clawback.
Offer payment for bonuses, commissions or royalties.
Like overtime, bonuses and commissions are usually considered to have been earned during employment, so they are typically not subject to EI clawback.
Pay the legal fees out of the settlement.
Legal fees are not subject to tax or EI clawback, so paying the full amount of legal costs out of a settlement will reduce the tax burden.
Pay for special damages.
Issues in the workplace, such as alleged harassment, may lead to payments for damages due to emotional distress, health issues, or human rights violations. This type of settlement represents compensation for damages to an employee's health, for psychological trauma, medical bills, or for injury to their dignity or reputation. Depending on how these payments are characterized, they are usually not classified as lost wages, and therefore not subject to EI clawback.
Offer payment in exchange for waiving rights to reinstatement.
An employee may have a right to reinstatement under the Human Rights Code, the Canada Labour Code, the Occupational Health and Safety Act or the Employment Standards Act. If you offer a settlement instead, this payment will be taxable, but not usually subject to EI clawback.
Offer payment in exchange for intellectual property rights.
Payments in exchange for intellectual property rights may not subject to EI clawback.
Payment for a covenant of confidentiality, non-disparagement, non-solicitation or non-competition.
Payment for these types of agreements may also be immune to EI repayment.
If your company is being sued for wrongful dismissal, this can have large financial repercussions. In addition to offering skilled representation, an experienced employment lawyer can structure agreements in a way that avoids unnecessary EI clawbacks and ultimately facilitates an efficient settlement.
Contact Hyde HR Law for expert advice and representation.