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A Sears store is seen inside a mall in Toronto on Thursday. Sears’s defined-benefit pension plan has a deficit of almost $267-million, court filings indicate.Cole Burston/Bloomberg

A battle is brewing over insolvent Sears Canada Inc.'s underfunded pension, retiree benefits and severance for 2,900 terminated employees.

Sears, which this week got court protection from its creditors, is letting go 17 per cent of its 17,000 employees as it closes 59 of its 255 stores. The ailing retailer confirmed on Friday it doesn't intend to pay severance to those laid-off staff as it scrambles to revive its flagging fortunes amid a fast-changing retail landscape.

The previous day, Sears had asked Ontario Superior Court to allow it to stop contributing to its defined-benefit pension for current and retired staff as well as stop paying medical, dental and life-insurance benefits for 18,000 retirees, ranging from former store salespeople to top executives.

"The retirees are very concerned about the underfunded Sears pension plan and the future motions contemplated by the company with respect to suspending special payments to the pension plan and suspending health benefits," said Andrew Hatnay, lawyer at Koskie Minsky LLP, which represents retirees and some employees. "We are having discussions with the company about their proposed motions."

Sears's refusal to pay severance to laid-off employees "is terrible," said employment lawyer Lior Samfiru of law firm Samfiru Tumarkin LLP, which has represented former Sears employees prior to the filing. "Employees are left with no legal remedies."

In a last-gasp effort, Sears on Thursday got creditors' court protection which shields the retailer from legal actions against it and gives it breathing room to slim down and catch up to nimbler rivals. But its declining financial results raise questions about whether it can turn itself around in the insolvency process. Meanwhile, its current and former employees grapple with the spectre of losing out on payments they had been counting on in their budgeting and retirement.

Sears said in e-mailed responses to questions that its lawyers will be back in court on July 13 to set out the retailer's requests regarding pension and benefit payments.

"The company has not finalized its decisions regarding what it will be requesting from the court at that time," it said. Still, the day before, it said in court documents it wanted to halt its defined-benefit pension and retiree benefit obligations.

Sears's defined-benefit pension plan has a deficit of almost $267-million, court filings indicate. To make it up, it would need to contribute $3.7-million a month to it, they say. And it has $196-million of liabilities tied to the retirees' medical, dental and life insurance benefits plan, the filings say.

Sears said laid-off employees who believe they have compensation claims are eligible to participate in the insolvency court's claims process, which puts them in line among other unsecured creditors and behind secured creditors. "This is unfortunate but common in the context of CCAA proceedings," Sears said in its e-mail. It was granted court protection under the Companies' Creditors Arrangement Act (CCAA).

But Mr. Samfiru said that, in many of these types of insolvency cases, companies agree to pay minimum statutory severance, which is one week of salary for every year of service to a maximum of eight weeks.

He said a lot of the Sears employees have been with the company 15 to 25 years, and severance payments increase with an employee's age, seniority and length of employment.

For instance, an employee with 20 years' seniority and an annual $50,000 salary could be eligible for 24 months of severance or $100,000, he said.

Sears's insolvency will have "a huge impact, not just from a severance standpoint but also from a pension standpoint," Mr. Samfiru said. "There's really no silver lining here, unfortunately."

Just days before the filing, Sears revoked previous severance offers, "essentially daring these employees to commence legal action if they were to pursue their full entitlements," he said.

He said he's received "quite a few" calls from current Sears employees asking him whether they should stay at the retailer. "'Perhaps it's better, if there is an opportunity somewhere else, to take it,'" he said he has responded.

He said Sears could stumble in its restructuring initiatives and end up closing all its stores and letting go all of of its employees, leaving them without severance.

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