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LTD claims by dismissed employees

Image: www.cba.org

Image: www.cba.org

Employers that dismiss employees without cause, and without ensuring that they take steps to preclude all potential claims, can face significant liability beyond the “typical” wrongful dismissal damages. The recent decision of Mr. Justice Echlin of the Ontario Superior Court of Justice in Brito v. Canac Kitchens is an example of the type of situation employer’s dread. In that case, not only was the employer found to be on the hook for a lengthy notice period, they were also ordered to compensate the Plaintiff for lost disability benefits arising out of his termination. Punitive damages were added to the total, while moral damages were considered but ultimately not awarded.

The Plaintiff, Mr. Olguin, was employed by Canac Kitchens from 1979 to 2003. At the time of dismissal without cause, he was 55 years old. There was no written or verbal agreement regarding notice of dismissal. Canac chose to provide the absolute minimum notice and severance required by statute, despite 24 years of service.

As Mr. Justice Echlin noted, when an employer chooses to dismiss an employee on a without cause basis, they must “make the employee whole” for the common law period of reasonable notice (unless there is a contractual prevision that provides otherwise). Subsequent to his dismissal, Mr. Olguin obtained new employment, albeit at substantially lower rate of pay. However, approximately 16 months after he was dismissed by Canac Kitchens, Mr. Olguin underwent surgery for laryngeal cancer. He required subsequent treatment and a number of additional surgeries. Needless to say, he was unable to continue working. However, he was also unable to make a claim for disability benefits, as Canac Kitchens had only continued his disability coverage for the 8 week notice period required by statute.

Perhaps not surprisingly, Mr. Olguin sued for wrongful dismissal, seeking additional notice and damages for the loss of disability benefits. In his decision, Mr. Justice Echlin found that a notice period of 22 months would be appropriate. He took the opportunity to explicitly note that “the existence of any real or imagined ‘rule of thumb’ has been ruled out by the Court of Appeal for Ontario”, and referenced a 1999 decision as authority for this.

I note that despite the fact that the Courts have made it clear that there is no such rule of thumb, and that statistical data based upon actual court decisions clearly refutes the existence of such a rule of thumb, I continue to hear references to it on a weekly, if not daily, basis. Employers and employees should disabuse themselves of any such notion. Length of service is not the only relevant factor in accessing notice periods.

The next issue tackled by Mr. Justice Echlin was the claim for disability benefits. While Canac raised a number of arguments in defence of its position that it should not be liable for short term or long term disability, they were all rejected. Mr. Justice Echlin’s opinion of the company’s approach to this dismissal is fairly evident in the wording of this particular paragraph of the judgement:

[13] Canac consciously chose not to make alternative arrangements to provide its loyal, long-service employee with replacement disability coverage. Rather, it chose to go the “bare minimum” route. It provided only the statutory minimums in pay and benefits and then gambled that he would get another job and stay well. When it lost that gamble, it chose to litigate this matter for over five years. When confronted with its potential significant exposure, it raised the argument that Mr. Luis Romero Olguin failed to mitigate his potential damages by purchasing a replacement disability policy.

Ultimately, Mr. Justice Echlin ordered Canac to pay for damages arising out of lost short term disability coverage in the amount of $9,078.94. Furthermore, he awarded compensation at the rate of $5,916.67 for the period from November 6, 2004 to May 15, 2005, plus long term disability benefits at the monthly rate of $2,096.04 from March 4, 2005 to March 5, 2007 and $146,723.00 in damages for lost LTD benefits for the period of March 6, 2005 to the outset of trial. Finally, he determined the present value of the remainder of the long term disability entitlements, to the Plaintiff’s 65th birthday, to be $47,941.

This case is an important reminder of a potential source of significant liability. As Mr. Justice Echlin made clear, employees that are dismissed without cause must be “made whole”. What this means is that by default, they are entitled to all forms of compensation that they would have received had they worked through the notice period. In other words, it is not enough to simply pay an individual’s basis salary. They are entitled to the bonuses, commissions, and benefits that they would have received if they had been working. This obligation can be modified by contract, or by an enforceable policy. For that reason, I encourage employers to use contracts in order to explicitly state what will happen with respect to various forms of compensation in the even of dismissal. This is relevant for a number of types of compensation, such as commissions and bonuses. I am often approached by clients who are faced with a dispute regarding commissions and/or bonuses that a dismissed employee claims they are entitled to. In the absence of contractual or policy terms that state otherwise, the employee is often correct.

The issue of disability benefits is a long standing one that, for whatever reason, has been largely ignored. Although the law has always been that benefits should continue through the entire notice period, insurers have steadfastly refused to continue coverage for employees that are no longer actively employed. Changes to the Employment Standards Act resulted in continuation of coverage during the statutory notice period, but did not address the balance of the common law or contractual notice period. As a result, employers routinely offer packages that will continue the vast majority of benefits throughout the applicable notice period, with exceptions such as short and long term disability.

The question of what would happen in the unfortunate event that the employee became disabled during the notice period, but after coverage had ceased, has been largely ignored. However, a few years ago, the issue was raised in the Egan v. Alcatel case, in which the Plaintiff was awarded damages as a result of lost benefits.

Nevertheless, and dispute the warning that the Alcatel case should have brought to employers, the traditional approach has remained largely unchanged. Employees continue to be dismissed without continuation of disability coverage. As I routinely advise our clients, if that is the case, and if there is no contractual basis to say the coverage should end, the employer is exposed to substantial liability. Unless they can negotiate a severance package that includes a full and final release, employers are well advised to look into replacement coverage for the employee. Not long after the Alcatel decision, some opportunistic insurers wrote to me and many other who practice in this area, offering “transitional coverage” during the notice period for this specific type of circumstance.

In the Canac Kitchens case, Mr. Justice Echlin awarded punitive damages in the amount of $15,000 as a result of Canac’s cavalier, malicious, and highhanded treatment in adopting what the Court repeatedly referred to as a “hardball approach”. Mr. Justice Echlin also considered awarding moral damages (what I have been referring to as The Damages Formerly Known As Wallace since the Supreme Court of Canada’s decision in Honda Canada Inc. v. Keays), but found that the specifics required had not been pleaded or proven.

If the Alcatel decision of a few years ago did not cause employers to take notice of the issue regarding damages for lost disability benefits, hopefully the Canac Kitchens case will. Employers will be best served by a contractual agreement that clearly states what forms of compensation will, and will not, continue during a period of salary and benefit continuance. Otherwise, they should be extremely cautious when dealing with dismissals, and ensure that they obtain a release or arrange alternative coverage so that they are not exposed to significant liability.

Stuart Rudner
Miller Thomson LLP

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Stuart Rudner

Employment Lawyer at Rudner MacDonald LLP
Stuart Rudner is a leading HR Lawyer and a founding partner of Rudner MacDonald LLP, a firm specializing in Canadian Employment Law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is the author of You’re Fired! Just Cause for Dismissal in Canada, a textbook and database of summary dismissal cases published by Carswell. Read more
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