Neutral Citation: 1999 ONFSCDRS 135

FSCO A97-001498

BETWEEN:

DONNA GLIONNA

Applicant

and

ALLSTATE INSURANCE COMPANY OF CANADA

Insurer

REASONS FOR DECISION

Before:

Deena Baltman

Heard:

May 3, 1999, at the Offices of the Financial Services Commission of Ontario in Toronto.

Appearances:

Brent S.J. Cumming for Mrs. Glionna

Ian D. Kirby for Allstate Insurance Company of Canada

The issue in this case is when various payments, made upon retirement, become income for the purpose of calculating the amount of death benefits available under the Schedule.¹

The Applicant, Donna Glionna, is the widow of Peter Glionna, who died following a car accident on January 31, 1996. Mrs. Glionna claimed and received a death benefit from Allstate Insurance Company of Canada (Allstate). However, Mrs. Glionna disputes Allstate's calculation of the death benefit. Specifically, she asserts that two payments received by Mr. Glionna upon retirement — an ex gratia payment and the payout of his accumulated sick leave — should be included in his income during the 156-week period before the accident. If she is correct, this would have the effect of increasing the death benefit by approximately $53,000, plus interest.

The issues in this hearing are:

Is an ex gratia payment made upon retirement included as income in the calculation of death benefits?
Is a payout of sick leave made upon retirement included as income in the calculation of death benefits?

The ex gratia payment is included as income in the calculation of death benefits.
The payout of sick leave is not included as income in the calculation of death benefits.

The facts are largely agreed upon. Mr. Glionna worked for over 33 years as the Director of Operations for the Transportation Department of the City of North York (the City). He retired on January 4, 1994, within the 156-week period preceding his fatal accident of January 31, 1996. At the time of his retirement Mr. Glionna was earning approximately $72,000 per year, plus benefits.

Mr. Glionna's retirement was voluntary and based on the "85 factor," whereby his age at the point of retirement (51.5 years) and years of service (33.5) amounted to 85, thereby entitling him to a full pension and other benefits. Rather than continuing to work beyond the "85 factor," Mr. Glionna negotiated a retirement package with the City. This included the two sums which are in issue in this case:

A sum of $36,017, described by the City as an "ex gratia payment." It represented six months of income.
A sick leave payout, also in the amount of $36,017. This was the payout of sick time which Mr. Glionna had accumulated over his employment.

The sick leave and ex gratia payments, combined, amounted to $72,034, which was paid to Mr. Glionna upon his retirement in January of 1994.

After Mr. Glionna died in the car accident, Mrs. Glionna applied to Allstate for death benefits. Under sections 51 and 81 of the Schedule, the death benefit payable to Mr. Glionna is determined, in part, by his income from employment during the 156-week period preceding his accident. The parties agree that the payments in dispute constitute employment income. The question is when they became income: Mrs. Glionna asserts that the payments became income when they were received by Mr. Glionna, i.e., upon his retirement and during the 156-week period preceding his death, and therefore should be included in the calculation of the death benefit. Allstate argues that the payments, although received by Mr. Glionna upon his retirement, became income long before, and well outside the 156-week period preceding his death. Allstate therefore excluded the payments from its calculation of the death benefit owing to Mrs. Glionna.

1. The Law

This appears to be a novel issue. Counsel did not refer me to any cases that had directly considered the question of when the payout of a sick bank, or an ex gratia payment made upon retirement, become income.

The Schedule provides no indication as to when these payments should be recognized as income. Numerous cases at the Commission have grappled with the question of when other types of payments become income. For example, vacation pay is attributed over the period during which it is accrued, rather than when it is paid out.² Real estate commissions may be attributed at the point where a deal becomes firm, or when it closes, depending on the particular case.³

Several cases, including one of my own,⁴ have approached the issue by stating that income should be recognized when it is "earned," rather than "received." The difficulty with this approach is that it poses yet another question, namely what does one mean by "earned"? Is income earned at the point when the work is performed? Or only once there is a legal right to recover it? Either method is problematic. In the former case, where income is recognized when work is performed, it may be that some workers are not paid in direct proportion to the work they do, or it is difficult to identify when each stage of the work is completed. Examples include construction workers, persons retained under contract, or real estate agents. In the latter case, where income is attributed according to when it is payable, legal ambiguity in a contract of employment may make it unclear precisely when a worker is entitled to payment. More importantly, this approach may contradict the legislative intent underlying the payment of death benefits, namely to compensate an applicant for the loss of an income-producing spouse. Arguably, such compensation should not depend on whether the deceased, by the time of the fatal accident, had an indisputable right to recover wages for work already performed, or whether such right might only have vested at a later date.

Further complicating the matter is that even in cases involving similar types of employment, applicants have taken different approaches, depending on when their accident occurred. In situations where, at the time of the accident, the work has been performed but any earnings are not yet payable, the insured person naturally argues for a work-based approach. Conversely, where the work was performed before the 156-week period preceding the accident but the applicant only became eligible to recover it within that period, he/she will argue for an entitlement approach. In other words, whether an applicant advocates a work-based approach or an entitlement approach will likely depend on when the accident happened in their employment cycle.

In my view, two possible principles emerge from all this. First, the timing of the accident, being purely fortuitous, should not in itself be the factor determining what approach an arbitrator applies. Second, it is also apparent that the Schedule does not require a single accounting method in all cases, nor is such an approach desirable. Given the multiple arrangements that exist within various workplaces, it makes sense, as several arbitrators have suggested, to assess "the nature and character of the payment"⁵ in question, viewed in the context of the workplace in which it operates, and being mindful of the underlying intention of the legislation. As Senior Arbitrator Naylor stated in Yen V. Nguyen and Progressive, supra, note 2:

Arbitrators have adopted a variety of approaches in determining how payments should be allocated. There is no generally established method of attribution. It is very much fact-based - what best meets the objective of the Act in reflecting the applicant’s earnings for the periods of time set out in the Schedule.

In that vein, I proceed to analyse each of the two payments in issue in this case.

2. The Ex Gratia Payment

As noted above, this consisted of $36,017, representing six months of income, and was made to Mr. Glionna when he retired. Both parties agree that it was a voluntary payment, which is consistent with the definition of ex gratia in both the Concise Oxford Dictionary ("a favour rather than from an (esp. legal) obligation") and Webster’s Collegiate Dictionary ("as a favour: not compelled by legal right")

I received little explanation for this payment. The City was not obliged under its terms of employment with Mr. Glionna to offer this sum; it appears to have been made as part of a retirement package that it negotiated with him. Mr. Frank Whelan, the accountant who testified on behalf of Allstate, was advised by the Manager of Human Resources for the City that the payment was "in recognition of his long service." No one disputed that this was what Mr. Whelan was told, or that is how, at least for official purposes, the City describes it. The most plausible explanation is that it was offered in order to encourage Mr. Glionna to take an earlier retirement than he might otherwise, thereby saving the City money.

Allstate argues that because the payment was reportedly made in recognition of Mr. Glionna's long term service, it should be attributed to him over his entire period of employment, rather than upon retirement, when it was paid to him. This would mean that only a fraction of the payment could be considered as income within the 156-week period preceding his death.

My difficulty with this argument is that the ex gratia payment was purely discretionary. Although the City allegedly paid it in recognition of Mr. Glionna's long term service, it had no obligation to pay it or even accumulate it on his behalf at any time, much less commensurate with his years of service. Consequently, I see no basis for tying the payment into work performed by Mr. Glionna over the years preceding his retirement. I find that the ex gratia payment could not be considered income any time before it was offered to Mr. Glionna, which, in this case, was contemporaneous with his retirement and within the 156-week period preceding his accident. I therefore conclude that it should be included as income in the calculation of his death benefit.

3. The Sick Leave Payout:

This payment was also in the amount of $36,017, because it too represented six months of income.

City employees are entitled to 18 sick days per year (1.5 days per month). Any unused days can be accumulated in a sick bank for future needs. In addition, an employee is entitled, upon retirement, to recover the cash value of one-half of his cumulative sick pay credits. However, the cash payout must correspond to a schedule that equates years of service with the maximum recoverable salary. For example, an individual employed for a minimum of 10 years may, upon termination or retirement, recover a payout of up to three months of his salary. Twenty sick days are required to produce one month of salary.

The maximum payout is six calendar months salary, provided an individual has been employed for at least 25 years. In that case, to recover the maximum of six months, he must have accumulated 240 days in his sick bank.⁶ Mr. Glionna's employment file reveals that by 1981, he had accumulated 240 sick days, the maximum number that he was entitled to upon termination. Although any sick days that he accumulated thereafter could not have increased the amount of the sick bank, Mr. Glionna was apparently a fairly healthy and/or conscientious man; by the time he retired he had accumulated 415 sick day credits, 175 more than he needed to qualify for the maximum payout of six months salary.

Mrs. Glionna argues that the sick leave payout was earned on retirement, rather than on an ongoing basis over the period of Mr. Glionna’s employment. Allstate submits that because Mr. Glionna accumulated the sick bank throughout his employment, he earned that benefit as it accrued and not when it was paid out.

Using the analysis I described above, two possible approaches exist. One is to attribute the sick bank to Mr. Glionna at the time it accrued, which, in this case, occurred over several years but well before his retirement. This would mean that the sick bank is not included in the calculation of his death benefit.

The other approach is to recognize the sick bank payout at the point where it was payable to Mr. Glionna. However, that date is not obvious. The employment provision in question, entitled "Criteria for Sick Time Payout," requires the payment to be made "upon termination of employment," which occurs when an employee resigns or retires. Mrs. Glionna argues that in this case, because her husband's employment did not terminate until 1993, the sick bank payout was not payable until then. Until he either resigned or retired, she submits, his sick bank could not be converted into cash, and therefore had no value.

Allstate contends that the sick bank had value long before Mr. Glionna retired. In order to be eligible for the payout, Mr. Glionna had to accumulate 240 sick days, which he did by 1981, and be employed for 25 years, which he was by 1985. That he elected not to resign then does not change the fact that by 1985 he was eligible for the payout. His entitlement existed for several years thereafter; it merely didn't crystallize until he left the City. Allstate should not be penalized, it argues, because Mr. Glionna chose to remain with the City and thereby deferred the payout for several years. At the very least, the sick bank had value at the point where it could be converted into cash; in this case that was in 1985. It was then available to him, and remained so. Put another way, the value was amassed long before retirement, but not collected until then.

Having said all this, I do not find it necessary to determine when the sick bank was payable, as I am not persuaded that the entitlement approach is the correct one in this case. I find more merit in the first approach, based on when the sick bank accrued. Here it did so steadily, throughout Mr. Glionna's employment. Sick days were allocated on a monthly basis and, to the extent they were not used, credited to his sick bank. In addition, his employment contract provides that the amount of the payout is to be calculated according to the duration of his employment. This reinforces Allstate's argument that this benefit was acquired commensurate with Mr. Glionna's years of service. On the facts of this case, it better reflects the reality of Mr. Glionna's earnings profile to allocate the sick bank at the rate that it accrued, rather than to attribute it exclusively to the date when it was paid.

Allstate also relied on previous Commission cases that determined that vacation pay accrued over the period of employment.⁷ It suggested that a parallel should be drawn with sick leave, as it too is allocated on an annual (or monthly) basis. In my view, cases involving vacation pay are not directly comparable. Vacation pay is statutorily mandated under the Employment Standards Act. It provides that where employees have not been given their allotted vacation time, they are entitled to vacation pay on wages earned in the previous twelve months. The statute, therefore, by its wording, makes it clear that vacation time or pay in lieu thereof must be given on an annual basis, leading easily to the conclusion that vacation pay accrues annually. There is no similar statutory provision regarding sick leave or payment in lieu thereof. And even though Mr. Glionna’s employment contract allowed him to bank unused sick time, it did not require the employer to pay out any unused sick time on an annual basis.

I was more persuaded by Allstate's point that if Mrs. Glionna is correct, a most peculiar result will befall an insured person who, in a similar employment situation, was seriously injured rather than killed in an accident. If following the accident he opted to retire and cash in his sick bank, the Insurer would be entitled, under section 10 of the Schedule, to consider that payment post-accident income and deduct it from any income replacement benefit payable. I believe that the legislators did not intend such a result, but instead anticipated that income would be recognized in connection with the employment process itself, and not as an isolated payment made on a remote date.

The parties agree that the sick bank payout does not amount to "severance" or "termination pay," both of which are excluded from the determination of a person's income under section 87 of the Schedule. Mrs. Glionna argued that section 87 is exhaustive; as the Legislature did not specifically identify sick bank payouts as an exclusion, it intended that any such payments would be included as income. I am not persuaded that section 87 is exhaustive. As severance and termination pay are mandated under the Employment Standards Act, the legislators may have felt it necessary to distinguish them under the Schedule. Otherwise, applicants might expect those payments to be included as income. The payout of a sick bank, by contrast, is not a payment that is statutorily mandated upon retirement. It therefore did not require such clarification.

On that note, it is of some interest that elsewhere the Schedule specifically considers the possible impact of payments under a sick leave plan; section 75 prevents insurers from deducting such payments from income replacement benefits. Although not directly relevant to the issue at hand, it suggests that the legislators at least considered the interaction between the accident benefit scheme and any sick leave payments that might be available to an applicant. Had they wished to further address the impact of a sick leave plan, they could have done so.

Mr. Ian Wollach, the accountant retained by Mrs. Glionna, suggested that Mr. Glionna could not have earned the sick bank anytime before his retirement, because until he stopped working, its primary purpose was to provide for any illness which might arise. The payout, he argues, was a secondary purpose. I do not find these two purposes inconsistent; as of 1985, Mr. Glionna was eligible for the maximum payout, with the proviso that if he subsequently drew on his sick bank he may have reduced the amount of the payout.

Mr. Wollach noted that in his 1994 tax return, Mr. Glionna declared the payout as a retirement allowance, suggesting that is when it was earned. In my view, that is not determinative, as Revenue Canada commonly views income as earned in the year it is received. Nor is the result influenced by the fact that Mr. Glionna was entitled, upon his retirement, to roll the payout into an RRSP account. This option merely allows the recipient to minimize the tax impact of the payout.

Mr. Wollach also argued that because the sick bank is paid out at the employee's current salary rate, it should be considered as income at that time. I disagree; the bank is paid out at current rates merely to insure that an employee is not prejudiced by any delay between when the bank accrued and when it is received.

For all these reasons, I conclude that the sick bank should be attributed to Mr. Glionna at the time it accrued, rather than upon receipt. Therefore, it is not included as income in the calculation of his death benefit.

EXPENSES:

The parties briefly addressed the issue of expenses, and advised that there were no settlement offers for me to consider.

Although success was divided in this case, under normal circumstances I would award the Applicant her expenses. The case involved a novel legal issue and even partial success makes a significant difference to her recovery. Moreover, her solicitor presented the case in an expedient and professional manner.

However, the Insurer submitted that even if Mrs. Glionna was successful, I should not award her expenses because through a miscalculation it had earlier overpaid her several thousand dollars in death benefits. Allstate is not seeking a repayment or set off, but suggests instead that this should bear on the issue of expenses.

I am reluctant to deny legal expenses to Mrs. Glionna and, by implication, her solicitor, when neither did anything to encourage the overpayment. By denying her expenses I would indirectly be giving Allstate a repayment when it is otherwise not entitled to one.

I would therefore allow Mrs. Glionna her legal expenses of the hearing, with the comment that in these circumstances I would expect that the expenses claimed will be fair and moderate.

July 14, 1999

Deena Baltman Arbitrator

Date