Employment Insurance and Wrongful Dismissal: The Double Recovery Problem

How Employment Insurance Works After Termination

When an employee is terminated without cause, they are generally eligible for Employment Insurance (EI) regular benefits. The eligibility requirements include having worked in insurable employment for the required number of hours (typically 420 to 700 hours, depending on the unemployment rate in the employee's region), being available for and seeking work, and having experienced an interruption in earnings.

A termination without cause satisfies the interruption requirement. The employer must issue a Record of Employment (ROE) within five calendar days of the termination, coded as a layoff or termination (code M — Dismissal, code N — Return to school, code K — Other, or another appropriate code). The ROE coding matters — a code indicating "Quit" (code E) can trigger a disqualification period.

EI regular benefits are paid at 55 percent of the employee's average insurable weekly earnings, up to the maximum insurable earnings ceiling. In 2026, the maximum insurable earnings are approximately $65,000 per year, which means the maximum weekly benefit is approximately $688. Benefits are paid for a maximum of 14 to 45 weeks, depending on the regional unemployment rate and the employee's hours of insurable employment.

There is a one-week waiting period before benefits begin. Benefits are not retroactive to the date of application — they start after the waiting period following the application date.

The Allocation Problem

When an employer provides a lump-sum severance payment at the time of termination, Service Canada "allocates" the payment to weeks of employment, beginning with the week of termination. This allocation delays the start of EI benefits.

The allocation depends on how the severance payment is characterized:

Termination pay (pay in lieu of notice) is allocated to weeks. If the employer provides 12 weeks of pay in lieu of notice, the EI benefits are delayed by 12 weeks — because the employee is considered to have received earnings for those 12 weeks.

Severance pay (ESA section 64) is not allocated. The ESA's statutory severance pay — one week per year of service, up to 26 weeks — is not treated as "earnings" for EI purposes and does not delay the start of EI benefits.

Retiring allowances (a tax term that includes severance packages that exceed the ESA statutory minimum) may or may not be allocated, depending on their characterization. Payments that are explicitly for lost earnings during a notice period are allocated. Payments that are characterized as general damages or compensation for the loss of employment itself may not be allocated.

The characterization of the severance payment — how it is described in the settlement agreement or court order — directly affects the EI allocation. This is why employment lawyers pay careful attention to the language used in settlement agreements. A payment described as "12 months' salary in lieu of notice" is allocated in full. The same payment described as "a retiring allowance in consideration of the loss of employment" may receive different treatment.

The Repayment Obligation

The more complex issue arises when an employee receives EI benefits and subsequently receives a wrongful dismissal settlement or court award. The settlement or award covers the same period that the EI benefits were paid for. The employee has, in effect, been compensated twice for the same loss.

The Employment Insurance Act Mechanism

Section 45 of the Employment Insurance Act addresses this situation. When a claimant receives earnings (including settlement payments or court awards) that are allocated to weeks for which they also received EI benefits, the claimant has an obligation to repay the EI benefits — or, more precisely, the employer that funded the EI system has a right to recover the benefits.

The mechanism works as follows: when a wrongful dismissal settlement is reached, the settlement amount is allocated to weeks of the notice period. If the employee received EI benefits during those weeks, Service Canada calculates the "overpayment" — the EI benefits that would not have been paid had the settlement been received at the time of termination. The overpayment must be repaid.

In practice, the repayment is often handled through the employer. The settlement agreement typically includes a clause requiring the employer to repay the EI Commission directly for the benefits the employee received during the notice period. The employee's net settlement is reduced by the amount of the EI repayment.

The Ontario Court of Appeal Approach

The Ontario Court of Appeal addressed the interaction between EI benefits and wrongful dismissal damages in Dowling v. Ontario (Workplace Safety and Insurance Board), 2023 ONCA 369, and in earlier decisions. The general principle is that EI benefits received during the reasonable notice period must be accounted for in the wrongful dismissal damages calculation — but the mechanism for doing so depends on the circumstances.

The Court has held that the employee should not receive a "windfall" by collecting both EI benefits and full wrongful dismissal damages for the same period. However, the Court has also held that the employer should not benefit from the EI system by having its wrongful dismissal liability reduced dollar-for-dollar by the EI benefits the employee received. The EI system is funded by employer and employee premiums — it is not a subsidy for employers that terminate employees without notice.

The practical resolution is typically handled in the settlement agreement. The employer pays the full wrongful dismissal damages, the employee repays the EI benefits received during the notice period (or the employer repays them directly to Service Canada), and the net result is that the employee receives their full wrongful dismissal entitlement minus the EI repayment — which means they keep the same amount they would have received had they not collected EI.

The Practical Impact on Settlement Negotiations

The EI interaction has important practical implications for settlement negotiations:

The employee's "real" recovery is reduced by the EI repayment. If an employee receives $100,000 in wrongful dismissal damages but must repay $20,000 in EI benefits received during the notice period, the net recovery is $80,000. The employee's lawyer should account for this in calculating the minimum acceptable settlement.

The timing of settlement matters. An employee who settles early in the notice period may have received fewer EI benefits and therefore has a smaller repayment obligation. An employee who settles late — after receiving many months of EI benefits — faces a larger repayment.

The characterization of the settlement matters. As noted above, how the settlement payment is described affects the EI allocation. Payments characterized as general damages, human rights damages, or moral damages are not allocated in the same way as payments characterized as lost earnings. Careful drafting of the settlement agreement can minimize the EI repayment.

Tax implications interact with EI implications. The settlement payment is taxable income. The EI repayment reduces the net payment but may or may not reduce the taxable amount, depending on how the repayment is structured. The employee should consult both an employment lawyer and a tax advisor to understand the combined impact.

The Duty to Mitigate and EI

The duty to mitigate — the employee's obligation to seek comparable employment during the notice period — interacts with EI in a practical way. An employee who finds new employment during the notice period reduces their wrongful dismissal damages (because the mitigation income is deducted) but also stops receiving EI benefits (because they are no longer unemployed). The EI repayment obligation is reduced because fewer weeks of benefits were received.

An employee who does not find new employment during the notice period continues to receive EI benefits, which increases the potential repayment when the wrongful dismissal claim is resolved. However, the employee's failure to mitigate may also reduce their wrongful dismissal damages — the employer may argue that the employee would have found comparable employment sooner had they conducted a reasonable job search.

The duty to mitigate and the EI interaction create a complex incentive structure. The employee is better off financially if they find new employment quickly — the mitigation income typically exceeds the EI benefit rate, and the reduced EI repayment improves the net recovery from the wrongful dismissal claim.

Structured Settlements and EI

Some settlement agreements are structured to minimize EI complications. Common structures include:

Salary continuance. Instead of a lump-sum payment, the employer continues the employee's salary and benefits for the notice period. During the salary continuance, the employee is not eligible for EI (because they are still receiving earnings from the employer). When the salary continuance ends, the employee can apply for EI if they have not found new employment. This structure avoids the allocation and repayment problems entirely.

Lump sum with EI reimbursement clause. The settlement agreement provides for a lump-sum payment and includes a clause requiring the employer to reimburse Service Canada directly for any EI benefits the employee received during the notice period. The employee's net payment is reduced accordingly.

Mixed characterization. The settlement payment is divided into components with different characterizations — some as pay in lieu of notice (allocated), some as general damages (not allocated), some as human rights damages (not allocated). This structure can minimize the EI allocation while maintaining the overall settlement value.

What Employees Should Know

Apply for EI immediately. Do not delay your EI application while negotiating a severance package. The application establishes your eligibility and starts the waiting period. If you later receive a settlement, the EI interaction will be resolved at that time.

Understand that EI benefits may need to be repaid. If you collect EI benefits and subsequently receive a wrongful dismissal settlement, you will likely need to repay some or all of the EI benefits. This is not a penalty — it is the resolution of the double recovery problem. Factor the repayment into your settlement calculations.

Negotiate the settlement language carefully. How the settlement payment is characterized affects the EI allocation. Your employment lawyer should draft the settlement agreement with the EI implications in mind.

Consider salary continuance. If the employer offers salary continuance as an alternative to a lump-sum payment, consider the EI implications. Salary continuance avoids the EI allocation and repayment problems and provides a steady income stream during the notice period.

Consult professionals. The interaction between wrongful dismissal damages, EI benefits, and taxes is complex. An employment lawyer and a tax advisor can help you understand the net financial impact of different settlement structures and make informed decisions.

The Employment Insurance system and the common law of wrongful dismissal were not designed to work together seamlessly. They serve different purposes, operate under different rules, and are administered by different institutions. The employee who navigates the intersection successfully is the one who understands both systems — and plans accordingly.