Employment law settlements
This week we are talking about another important topic that at first glance sounds extremely boring: structuring settlements. We know, you are on the edge of your seat. In employment law, settlements (not to be confused with severance packages) usually occur when an employee is fired and then makes some kind of claim of wrongdoing against their employer for damages. Jill and Dana discuss all of the different elements that can go into an employment law settlement, give several examples of how the situation might play out, and explain tax implications of having a settlement paid out in different ways.
Episode transcript:
Dana DuPerron: Welcome to All Worked Up, a podcast where two employment lawyers break down real-life workplace issues that affect real people.
Jill Lewis:: And we’re super excited to bring you this podcast aimed at making employment issues interesting, accessible for employees and employers. Welcome to All Worked Up. I’m Jill.
Dana DuPerron: I’m Dana.
Jill Lewis: What are you all worked up about today, Dana?
Dana DuPerron: Oh, I’m all worked up about structuring settlement.
Jill Lewis: Oh, yeah.
Dana DuPerron: OK, it sounds so boring, but actually, this is how you put the most money in your pocket. So it’s actually a very important issue.
Jill Lewis: Yes, yes. And sometimes we leave it to the last minute to talk about it with clients. And it’s really important to think about this if you’re in any sort of negotiations because you may also want to talk to a financial advisor who can also give advice. So it is an important issue that we should talk about and people should know about right up front.
Dana DuPerron: Right. So OK, settlement. So we’re talking about – let’s use an example – an employee was fired. They were subject to discrimination in the workplace as well, based on a disability. They were fired, they think, because they had a disability.
The employer is never going to admit that. As part of a settlement, if you go all the way to a decision, a judge will make – or a tribunal will make a decision on whether or not that’s the case. But, in those instances, you can seek damages.
And there are other situations where you can seek damages too; general damages. And what we’re talking about there is money that’s paid to you and it’s not income, so it’s not taxed.
Jill Lewis: Right. OK, so there’s a few different buckets, if you think, when you’re doing a settlement or when you’re writing your demand letter. So when we draft the initial demand letter or if we do a Statement of Claim, we’re going to add every bucket we can to possibly, yeah, if you want to funnel some money in that bucket, maybe that’ll work. So the different pots that you can seek –
Dana DuPerron: All with a factual basis for it, right?
Jill Lewis: Of course.
Dana DuPerron: Yeah, there has to be, you’re not going to – you don’t want to waste time putting in something that there’s no basis for. But if there is a basis, you put it all in. You’re probably not going to recover all that because we’re also not going to make a claim that’s like, you know, this is – you have to give yourself wiggle room and stuff.
Jill Lewis: But you want to add in if you’ve got the facts. So let’s say for our factual situation, somebody who was there for 10 years. They were fired based on discrimination. Maybe there was some nasty gossip before they were leaving or something; the employer was being inappropriate or maybe set up a rumour about them. I don’t know. I’m coming up with stuff now. Bad employer.
Dana DuPerron: And they fire them for cause. They didn’t pay them anything.
Jill Lewis: Oh, oh, oh my goodness. OK. So you’ve all the potassium.
Dana DuPerron: Yeah.
Jill Lewis: So we have, just like our, what is it, lost wages, our lost income, income.
Dana DuPerron: [Unintelligible 00:03:06] damages. Yeah, so that’s the income.
Jill Lewis: That’s the obvious one.
Dana DuPerron: So your salary, your bonus, your benefits, your stocks, your pension loss, your other perks sometimes, sometimes not included. So yeah, that income, what you would have had in your job had you continued to be employed.
Jill Lewis: And so, if you get to the endstage or through a demand letter or maybe a mediation and the employer’s willing to pay something, that income is going to be taxed as income.
Dana DuPerron: Yeah.
Jill Lewis: Right? It’s taxed. It’s going to be called a retirement allowance.
Dana DuPerron: Sometimes. Not always.
Jill Lewis: I guess so.
Dana DuPerron: So not always.
Jill Lewis: I don’t know why that phrase is used. I can’t really explain why –
Dana DuPerron: Yeah, retiring allowance.
Jill Lewis: So retiring allowance. It does confuse people. But when it’s –
Dana DuPerron: People are like, “I’m not retiring.”
And you’re like, “No, no. That’s just like the CRA language” which means that it’s taxed at a flat tax rate only. So not EI, or no EI or CPP deductions or other deductions. But that means that you’re not getting EI or CPP credit for that money, so sometimes people don’t want it taxed as a retiring allowance.
So usually for amounts over, what, 15,000 it’s taxed at 30%. That’s the highest flat tax rate that you have for these amounts. Might you pay more tax on that money eventually?
Jill Lewis: Well, probably. Well, let’s say you had a 12-month settlement being paid out in December. Yeah, you’re going to be taxed at a much higher rate.
Dana DuPerron: Once you actually – when they tax you, they tax you –
Jill Lewis: When you do your taxes.
Dana DuPerron: – they take off 30%. You go and do your taxes and the CRA is still going to look at your whole income for that year and you may owe or you may not. But you know what they say. Taxes deferred is money saved, taxes saved. I don’t know what they say. Is that what they say?
Jill Lewis: Who says that?
Dana DuPerron: My second-year prof said that.
Jill Lewis: Oh, OK.
Dana DuPerron: So you know, you pay it then when tax time comes. And you have the money in your pocket for now, with interest rates what they are, maybe you get to grow it a little bit for four months.
Jill Lewis: Right, right.
Dana DuPerron: And then take it out and pay taxes on that.
Jill Lewis: Exactly. OK, so that’s just your basic, like that’s your lost income. But then there are also other damages like we’ve been talking about, called general damages. And this is to compensate for bad behaviour is kind of how I describe it. You know, like we’ve got bad faith. We’ve got, is it also just called aggravated –
Dana DuPerron: Bad faith damages are sometimes taxed. It depends on the circumstances. But there’s punitive and aggravated which are not.
Jill Lewis: Yeah. So aggravated damages, there’s got to be some pretty egregious behaviour there. You have to essentially prove that the employer was dishonest, insensitive. There’s a list.
Dana DuPerron: Callous disregard. Like yeah, the employee was unduly – undue disregard, or completed disregarded feelings and stuff at termination.
Jill Lewis: And there was a really interesting case that just recently came out. It was an employee against Hudson Bay Company. And the Hudson Bay Company, it was an employee I think of like 25 years, walked the employee out even though there was no evidence of any misconduct. So walked the employee out in front of his co-workers.
Offered him a job – this was the dishonest part – offered him another position but not really. Like I don’t quite – I’d have to get … I read the case but I didn’t quite understand what the sneak – there was some sneakiness happening there. So they were sort of offering him a job but didn’t really exist or something like that. So there was some dishonesty there.
Then they didn’t pay him his statutory amounts properly. They tried to pay it through instalments. And –
Dana DuPerron: Which you can’t do for severance if the employee won’t agree. You can do it for notice pay but not that stat severance. Go back to the beginning; you hear all about what that is on episode four or something like that. Anyway.
Jill Lewis: But it’s important because employers will make those decisions sometimes, put them right in writing. And sometimes they don’t know about it. But the court had said that this was a big enough company that –
Dana DuPerron: [Unintelligible 00:06:59] know about it.
Jill Lewis: Yeah, exactly. They were like, come on. You should know about this. And I think that’s another big piece too is courts will want to specially make an example out of a company this large. You know, what’s going to keep them from doing it again is maybe a financial award for the employee.
So that case is really good because it goes through some of that behaviour. But it is hard to prove, you know, to prove that they truly were not honest about the job offer. So then they tried to withhold – they tried to pay out statutory minimums through instalments. That all led to aggravated damages. The employee got $55,000 for aggravated damages.
Dana DuPerron: Wow, in aggravated damages. That’s high.
Jill Lewis: That’s really high. I think it was because the company was so large. And then he got another $10,000 for punitive damages. And the punitive damages, you have to go even farther and show an independent actionable wrong, which can be really hard. But a breach of the ESA amounts to an independent actionable wrong.
And that’s what the court said, “You withheld, or attempted to contract out of the ESA and you can’t” and put them on the hook for 10 grand punitive damages. So there you go. And that kind of stuff can happen sometimes. An employer withholds vacation pay or tries to pay something out improperly.
So those are like the buckets. Those are some of the main buckets. And then there’s human rights damages of course. So for our scenario, if there’s a disability and you believe you’re fired for a disability, you could claim for human rights damages. And those will not be taxed.
Dana DuPerron: OK. So that just puts whatever money you get for those awards is just in your pocket. There’s going to be a term in the release, if it’s a settlement, that says you’re on the hook if the CRA determines that you owe money. And we probably talked about that in our episode on releases.
Jill Lewis: Yes.
Dana DuPerron: But, so that’s money in your pocket tax free. Park that.
Jill Lewis: OK.
Dana DuPerron: What can we do –
Jill Lewis: (Sound effect) Sorry, that’s me parking.
Dana DuPerron: Was it a parallel?
Jill Lewis: Never. Never.
Dana DuPerron: Did you reverse in? Anyway, what can we do with that income that is taxable, whether as a retiring allowance subject to that flat rate or just regular your marginal tax rate, how can you put more money in someone’s pocket when that money is being taxed?
Jill Lewis: What can we do? Yeah, so you’re going to get let’s say right now, so right now we’re recording this at the beginning of December, and we do have settlements that people are wrapping up right now. And like we said, if you’re going to get a full year salary in December when you’ve just finished a full year of work, you’re going to be taxed at a huge rate.
So a few things. You can allocate into or direct the money into an RSP before the money is taxed. It’s fairly simple. I don’t think I’ve ever had an employer that said no to doing that.
Dana DuPerron: Yeah, you often want to see that you have enough RSP room, because nobody wants to be dinged with penalties for putting in money that they couldn’t put in. So you’ll probably have to give a blacked-out version of your last notice of assessment that shows how much room you have, and confirm that you haven’t used that much room since you got that notice of assessment.
And what it would tell someone is only do that if you don’t need the money to live. Because you don’t want to put it into an RSP and then pull it out and start paying the taxes. So say you have another job that you’re going into, then fine. But if it’s December, your employment was just terminated, you get into a settlement quickly and you think it’s going to take you 12 months to find another job, unless you have savings that you’re using or a rainy-day fund that you’re using to live on, plunking that money into an RSP probably doesn’t make sense, even though it defers taxes.
Jill Lewis: And that’s why you do need to speak to a financial advisor. If you’re getting a big lump sum, just, yeah, immediately set up that call. As soon as you’re spoken to your employment lawyer, speak with a financial advisor, because they will have that conversation with you. How much do you need to live for the next year? You know, what is accessible?
And then you also have to provide their information. If you are directing it into an RSP, we need your account information and things like that.
Dana DuPerron: Yeah.
Jill Lewis: OK, so that’s the RSP bit. You can also direct the employer pay your legal fees out of the settlement. So let’s say we’ve got you $100,000 and it cost $2,500 in legal fees. And the employer may not be providing anything towards your legal fees. Sometimes they do and sometimes they don’t. This scenario, they’re not paying anything extra for legal fees.
But what they will do is they will pay the firm the amount of fees that you’ve already incurred out of the settlement before it’s taxed. So again, it’s a way to just get money out of the settlement before that big 30% tax rate comes down.
Dana DuPerron: Yeah, reduce the ultimate amount of tax paid.
Jill Lewis: Exactly. And so what we do, it’s not just like – it’s not money that goes straight to the client. We send the employer, it’s called a proforma invoice or proforma statement. And it just says, yes, this individual spent $2,500 on legal fees. The employer will then cut a cheque out of the settlement to the lawyer. We have to hold that cheque for 10 days and then it gets put into your trust account. It pays off anything that’s outstanding. And if you had put down a $1,500 retainer, you’ll usually get that back from us, a refund cheque back from us. So that’s one helpful way to get some of your taxes back.
Dana DuPerron: Another piece on that too is just, so something to consider is, so if that happens and that covers off your full – if your full legal fees are paid out of the settlement, then you cannot claim a deduction for your legal fees when you do your taxes. I’m not a tax expert so I don’t know exactly how it works, but if you pay your legal fees yourself, like if the employer won’t pay them or refuses to allocate to them, you can then claim a deduction, in certain instances, if those legal fees were incurred to earn income. So if it increased your package, then you have a deduction there that you can use. So it’s something to keep in mind, and to bring that bill to your tax person or whatever, if they’re doing your taxes, or to speak to someone about at tax time. So that’s the legal fees.
Jill Lewis: Yeah. And that’s why we can do that. And so, yeah, if you didn’t do that, it doesn’t mean – you can get the tax benefit at a later point. You’ll get it next year when you do your taxes.
Dana DuPerron: And same thing with the RSP. If they don’t pay it directly into an RSP, you can always put it in yourself after the fact and claim a deduction. I don’t know that it works out exactly the same. I haven’t looked into it too carefully.
But I’ve had people say to me, “No, it won’t be exactly the same. If they don’t do it then I won’t get the same benefit from it.” But if you need the money, you aren’t sure and then you find another job and now you want to plunk it into an RSP, you do get a deduction after the fact.
Jill Lewis: You do you. You invest the way you want to invest.
Dana DuPerron: Yeah, exactly.
Jill Lewis: It’s not for us to hone in on.
Dana DuPerron: So last one.
Jill Lewis: OK, so the last one would be, especially if you’re at the end of the year, is agreeing to having the amount paid out in the following year or through instalments.
Dana DuPerron: Yeah. Even if it’s at the beginning of the year. If it covers two years, split it over two years.
Jill Lewis: Perfectly legal.
Dana DuPerron: Split it over three if an employer will do that. If it’s, like you know, you get a 24-month notice period in June, do six months now, 12 months in 2023, six months in 2024.
Jill Lewis: Sure, keep going. I don’t see a lot of employers that love to do that because I think they like to have it off the books. They just want, it’s cleaner. I always find after the summer it gets so much easier to make that argument, to make that pitch to opposing counsel. How about we have some this paid out next year or January one.
Dana DuPerron: You’re like OK, at least gets done, yeah.
Jill Lewis: It always seems to be a bit easier when you’re in the fall that they’ll agree to that. Perfectly legal to agree as long as both sides are agreeing to have it paid out in instalments. And then obviously, it’s very beneficial for tax reasons.
But again, you’ve got to speak to a financial advisor because that’s what they’re there for is to tell you, OK, this is how much you can earn this year without jumping to the next tax bracket. So here’s what you should get paid out this year. Here’s what you should get paid out next year.
Dana DuPerron: And it’s where you have to look at your own personal circumstances too. Because if you’re like, well I’m going to defer it to next year but I think I’m walking into a [unintelligible 00:15:37] of $500,000 in January, then maybe you want it paid out now.
Jill Lewis: Exactly, yeah.
Dana DuPerron: And another thing that you can do – this is another instance where you might want your settlement to be salary continuance instead of lump sums, and then it’s just like regular payments with taxes withdrawn as you go. Sometimes with a salary continuance the minutes of settlement are more likely to be subject to a duty to mitigate and you have to report if you find another job. So you might not get that windfall that people are … You know we talked about it’s not supposed to be a windfall but –
Jill Lewis: Not supposed to.
Dana DuPerron: – oh, are people hoping for it. And I get it. So you know, that’s another thing to consider.
So there’s all kinds of interesting ways that you can structure these settlements in completely lawful ways. That’s what we want to be. Like this is all above board.
Jill Lewis: All legal, yes.
Dana DuPerron: It’s just, you know, to take advantage of –
Jill Lewis: Like a structure that’ll just help with your tax.
Dana DuPerron: Yeah. Just make sure you can put as much money in your pocket as possible.
Jill Lewis: Yeah, so you’re not paying CRA everything out of your settlement.
Dana DuPerron: Yeah.
Jill Lewis: But we’re not financial advisors, right? So as much as we can tell somebody, well there’s these options, you really have to speak with a financial advisor.
Dana DuPerron: This is the best option for them.
Jill Lewis: Yeah. This is why you have them too, for these big moments when you have a huge chunk of money; you just want to make sure it’s being structured properly. So speak with a financial advisor and then talk to your lawyer about how best to structure your settlement and hopefully get more money in the bank.
Dana DuPerron: Yeah, see what they’ll agree to.
Jill Lewis: Yeah.
Dana DuPerron: I think that covers it.
Jill Lewis: OK, great. Well thanks for listening guys. Don’t forget to Like, Follow, Share, listen.
Dana DuPerron: Subscribe.
Jill Lewis: Subscribe.
Dana DuPerron: And subscribe.
Jill Lewis: All right, we’ll talk to you next week. Bye.
