Anonymised, illustrative composite. The buyer accrued severance on total service for four long-tenured employees. Twenty-two of those years had already been paid for once, through a defined benefit plan, and s.65(2.1) takes them straight back out.
At a glance
A strategic buyer acquired the shares of a specialty chemicals manufacturer in eastern Ontario. The target ran a defined benefit pension plan closed to new entrants since 2004, and four employees on the buyer’s post-closing restructuring list were members of it — three of them in a phased-retirement arrangement under which they were already receiving an actuarially unreduced pension while continuing to work reduced hours.
Price was set on completion accounts, so the closing balance sheet was going to move real money. The buyer booked a severance accrual for all four on their full service.
The default rule is generous and the buyer applied it. ESA s.65(2) provides: “All time spent by the employee in the employer’s employ, whether or not continuous and whether or not active, shall be included in determining whether he or she is eligible for severance pay under subsection 64 (1) and in calculating his or her severance pay under subsection (1).” On that basis, thirty-one years of service is thirty-one years of severance.
Section 65(2.1), marginal note Exception, cuts across it: “Despite subsection (2), when an employee in receipt of an actuarially unreduced pension benefit has his or her employment severed by an employer on or after November 6, 2009, time spent in the employer’s employ for which the employee received service credits in the calculation of that benefit shall not be included in determining whether he or she is eligible for severance pay under subsection 64 (1) and in calculating his or her severance pay under subsection (1).”
Two things in that sentence do the work, and both are easy to skate past. The gate is in receipt of — not a plan member, not entitled at some future date, but actually receiving an actuarially unreduced benefit at the time employment is severed. And the exclusion bites on both tests: it removes the credited years from the s.65(1) arithmetic and from the five-year eligibility threshold in s.64(1).
Three of the four were in receipt. Their average total service was 31 years, of which 22 years carried service credits in the unreduced benefit, at average regular wages of $1,640 for a regular work week.
As accrued: 31 years exceeds the s.65(5) ceiling of 26 weeks, so the buyer had booked $42,640 each. As the Act computes it: 31 − 22 = 9 remaining years, or 9 × $1,640 = $14,760 each — well under the cap. Overstatement $27,880 each, or $83,640 across the three.
The fourth is the one that shows the eligibility limb doing work. He had 27 years of service, 24 of them credited in an unreduced benefit he was already drawing. Three years remain, which is below the five years the opening words of s.64(1) require, so no severance was owed at all. The buyer had accrued the 26-week maximum at his wage: $39,260, against an entitlement of nil. Total overstatement $122,900.
This is the only provision in the cluster that runs in the buyer’s favour, and the direction of the money is the part people get wrong. A severance accrual is a current liability. On a completion-accounts mechanism an overstated liability reduces delivered working capital, which reduces the price the buyer pays. So the party out of pocket on this error was the vendor, and it was the vendor’s accountant who found it.
There is a second provision in the neighbourhood that is frequently described as parallel to s.65(2.1) and is not. O. Reg. 288/01 s.9(1) prescribes employees who get no severance at all, and paragraph 3 is “An employee who, on having his or her employment severed, retires and receives an actuarially unreduced pension benefit that reflects any service credits which the employee, had the employment not been severed, would have been expected to have earned in the normal course of events for purposes of the pension plan.”
Different gate, different effect. Paragraph 3 requires the employee to retire on severance and requires the benefit to reflect the notional future credits the employee would have earned had the employment continued; where it applies, the employee is out entirely. Section 65(2.1) requires no retirement, looks only at credits actually received, and subtracts service rather than removing the person. Reading either as the other produces a reserve that is wrong by the whole entitlement rather than by a slice of it.
The vendor objected in the completion-accounts process, the buyer conceded on the wording of s.65(2.1), and $122,900 moved back into the closing statement in the vendor’s favour. Nobody litigated: the provision says what it says, and the plan’s own service-credit records answered the only factual question.
The buyer changed one diligence step as a result. Where a target has a defined benefit plan, the severance model now takes credited service from the plan administrator’s records rather than from the payroll hire date, and it flags separately which employees are actually in receipt of an unreduced benefit. See the glossary entries on the purchase price true-up and net working capital peg for how a closing-accounts error converts into price.
On a locked-box mechanism there is no true-up, so the same $122,900 error would have been baked into the price with nothing to correct it — and baked in against the vendor, who would have sold for $122,900 less than the accounts supported.
The error also runs the other way, and that version costs the buyer. A vendor that assumes s.65(2.1) applies to every member of a defined benefit plan, rather than only to those in receipt of an unreduced benefit, will under-accrue for every member who is merely entitled. On a plan of any size that is the larger of the two mistakes, and on a locked-box deal it is the buyer who wears it.
The severance schedule had one service column, and it was sourced from payroll. A target with a defined benefit plan has two service histories — the payroll hire date and the credited service in the plan — and s.65(2.1) is computed from the difference between them. A schedule that cannot show the difference has not applied the section.
The second tell was that every long-service employee on the list had been accrued at exactly 26 weeks. When a reserve is uniformly at the statutory cap it usually means total service went into the formula unexamined, which is precisely the calculation s.65(2.1) displaces.
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