Termination of Employment Tiggers Benefits Liabilities

Discussions relating to employees’ entitlements upon termination of employment tend to focus on the pay in lieu of notice (or “severance”) aspect. That is usually the most valuable element of the damages claimed by an employee in an action for wrongful dismissal.

Too little attention is given to the issue of the value of the benefits lost as a result of the termination. In some instances this can prove to be the loss of greatest value. The loss flows from the manner in which the employee’s benefits coverage was brought to an end.

When (rather than providing working notice of termination) the employer chooses to provide pay in lieu of working notice the pitfalls relating to the cessation of benefits arise. The problems occur because the language of disability insurance plans generally is not consistent with employers’ common law obligations towards their terminated employees.

Disability insurance coverage usually halts immediately upon the employee ceasing to be actively employed. The employer’s common law obligations, however, are based on the premise that an employee must be made whole for the loss of the entire working notice period.

During the notional working notice period the employee would be entitled to the benefit of all the usual employment perquisites, including disability insurance. This is where (what I call) the disability gap arises; the employer should provide benefits coverage during the notice period, but the insurance coverage will normally have been halted according to the terms of the insurance plan.

So, if the employee becomes disabled during the notional working notice period, the disability insurance is no longer available to provide benefits. As a result, the employer may be held liable for any benefits payments the employee would have enjoyed had she been given working notice.

The same risk arises when the employer chooses to dismiss the employment summarily for just cause reasons. If the just cause grounds are rejected by a court, the employer will be liable in the event of a disability arising during the notice period.

This situation does not arise all that often because, fortunately, it is a somewhat rare instance that a terminated employee becomes disabled during the reasonable notice period. But, when it does occur, it has the potential to be a very expensive liability for the employer.

In Ontario recently there was just such an instance. Alcatel Canada Ltd. was sued by a former employee, Mary Egan, for wrongful dismissal. The court found that Ms. Egan was entitled to a reasonable notice period of nine months’ duration. It also determined she had become disabled, as a result of a major depressive disorder, during the notice period.

The court determined that, had the employer given her the nine months’ working notice to which she had been entitled, the disability coverage still would have been in effect when she became disabled. The court confirmed “the law is clear that dismissed employees are to be kept whole throughout the entire reasonable notice period during which period employees are entitled not only to the continuation of salary but the continuation of all forms of employee benefits”.

As it happened in that instance, the period of disability was relatively short and did not result in additional damages payable to Ms. Egan. That would not have been the case, however, had her disability endured for a lengthy period. Alcatel, her former employer, would have effectively become her insurer for that entire period.

In Ms. Egan’s case, the lost disability benefits were valued at $5,787 per month. She was 42 years of age at the time of termination. Had she suffered a serious disability preventing her from working for 5 years the employer’s liability for benefits would have been close to $350 thousand. Had her disability prevented her from ever returning to work, the employer’s liability for benefits through to age 65 could have exceeded $1.5 million. Alcatel was very fortunate her disability was short-lived.

The best way for employers to eliminate this risk of liability is to implement binding employment contracts expressly terminating the entitlement to benefits upon cessation of active employment. If this contractual agreement is in place, the common law obligation to continue insurance coverage during the reasonable notice period is avoided.

The employer may also simply provide reasonable working notice and (as required) continue all the employee’s benefits during that period. Alternatively, the employer can purchase temporary insurance to bridge the gap in coverage (such insurance, however, can be difficult to obtain and comparatively expensive to purchase).

If the employer provides pay in lieu of working notice, it should obtain an enforceable release of all future claims (expressly including those arising under the disability insurance plans) from the employee.

Avoiding the disability gap is but one aspect of employee dismissal which, if handled poorly, can result in unwanted liability for the employer. As in many aspects of employment law, it is a liability which can be eliminated through the proper use of employment contracts.

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