Failure to continue disability coverage during the notice period

August 2, 2012 Rudner Law, Employment / HR Law & Mediation Employee Relations, Employment/Labour Standards, Human Resources, Payroll, Pensions and Benefits, Wages and Compensation

In my review of the decision of the late Mr. Justice Echlin of the Ontario Superior Court of Justice in Brito v. Canac Kitchens, I reminded employers of the danger of failing to continue disability benefits after dismissing an employee and providing pay in lieu of notice. In that case, the plaintiff was employed by Canac Kitchens from 1979 to 2003 and was 55 years old at the time of dismissal, which was without cause. The employer chose, as was its right, to provide pay in lieu of notice. However, it only provided the absolute minimum amount of notice and severance required by statute, despite the employee’s 24 years of service.

After he was let go, the plaintiff successfully obtained new employment. However, approximately 16 months after he was dismissed, he underwent surgery for laryngeal cancer and was effectively disabled and unable to work. However, Canac Kitchens had only continued his disability coverage for the eight-week period required by the Employment Standards Act, and the plaintiff was therefore unable to apply for benefits. He sued, and was quite successful at trial.

By default, when an employee is dismissed without cause, the law contemplates that the employer will provide the employee with notice of dismissal. Effectively, this is “working notice,” during which the employee is expected to continue to carry out her or his duties as in the past. The only change is that the employer would have an obligation to allow the terminated employee a reasonable opportunity to seek new employment. It is also open to the employer to provide pay in lieu of notice, by way of salary and benefit continuance, lump sum payment or some combination. This is the most common approach in Canada, although employers are perfectly within their rights to require that an employee continue to work during the notice period.

One of the difficulties that arises when employers provide pay in lieu of notice is in relation to specific employment-related benefits such as disability insurance. There is a fundamental principle that an employee that is provided with pay in lieu of notice is to receive all forms of compensation that they would have received had they continued to be employed during the notice period, unless there is a contractual term that states otherwise. However, the vast majority of insurers will not continue to insure an employee beyond the statutory notice period. As a result, for decades it was common practice for employers to cut disability coverage off at the time of or soon after dismissal. However, in recent years there have been several cases in which employees have successfully sued their employers for failing to continue disability coverage throughout the entire common law notice period.

In the Canac Kitchens case, Justice Echlin found that the applicable notice period was 22 months, and that Canac was liable for the employee’s lost disability benefits as a result of its failure to continue coverage. In addition, Justice Echlin awarded $15,000 in punitive damages as a result of the employer’s “cavalier, malicious and high-handed treatment” in the course of dismissal.

This matter was recently considered by the Ontario Court of Appeal, which affirmed Mr. Justice Echlin’s decision regarding Canac Kitchen’s obligation to compensate the employee for the loss of his disability benefits. The only aspect of the decision that the Court of Appeal changed was with respect to punitive damages. As the Court of Appeal pointed out, the employee did not claim punitive damages in his statement of claim; as a result, the Court found that “Whatever view one might hold of the Appellant’s conduct, it was not open to the trial judge to award punitive damages.” In other words, whether or not punitive damages were appropriate was irrelevant; the terminated employee did not request them in his statement of claim or during the hearing and it was not open to the court to award them.

While some may see this as a minor victory for the employer, the case remains an important reminder to employers that they face substantial liability if they do not address the issue of disability coverage during the notice period. Simply stating that the insurer will not continue coverage does not relieve the employer of its obligation; several court cases have made this clear. The employer may have to arrange alternative coverage in order to avoid effectively becoming the insurer. I always recommend to our clients that they include provisions in the contract of employment which clearly state that disability coverage will not continue beyond the statutory notice period. In the absence of such an agreement, employers face significant risk at the time of dismissal if they choose to provide pay in lieu of notice. Unless they can obtain an effective release of all potential claims, employers may be on the hook for damages if an employee becomes disabled during the applicable notice period.

Stuart Rudner
Miller Thomson LLP

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Rudner Law, Employment / HR Law & Mediation

Employment Lawyers and Mediators at Rudner Law

Rudner Law is a firm specializing in Canadian Employment Law. They provide clients with strategic advice regarding all aspects of the employment relationship, negotiate and advocate on their behalf and represent them before courts, mediators and tribunals. Blog posts are written by Stuart Rudner, the principal and founder of Rudner Law, Brittany Taylor, a Senior Associate at Rudner Law, Nadia Zaman, an Associate at Rudner Law and Anique Dublin, a Law Clerk at Rudner Law. Read more