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March 9, 2011

Employers can be liable for long term disability benefits

Authors Malcolm MacKillop and Hendrik Nieuwland

If your company is like many employers in Ontario, you provide your employees with some form of long term disability (“LTD”) benefits coverage, typically through a policy with a third party insurance company. And when an employee is dismissed without working notice, like many employers you probably end LTD coverage on the last day of work or the end of the statutory notice period. But what happens if a former employer becomes “totally disabled” over the common law notice period? Can the company be liable to pay LTD benefits to the employee? According to a recent decision in Brito v. Canac Kitchens, 2011 ONSC 1011, released on February 18, 2011, the answer is a resounding “Yes”. In that case, Canac Kitchens (“Canac”) terminated a 55 year old employee with 24 years service without cause and without working notice. He was paid only his minimum statutory notice and severance payments. His LTD coverage was terminated at the end of the eight (8) week statutory notice period. The trial judge found that the employee was entitled to common law reasonable notice of 22 months.

Nearly 16 months into the common law notice period, the employee was diagnosed with laryngeal cancer and received surgery and chemotherapy treatment, and thereafter was unable to engage in any work. The issue before the court was whether Canac was liable to pay LTD benefits that the employee would have received under the LTD policy had his coverage continued over the common law notice period.

Justice Echlin concluded that Canac was liable to pay the LTD benefits the employee would have received under the policy until age 65, valued at nearly $200,000. He rejected Canac’s argument that the employee had failed to mitigate by not purchasing replacement LTD coverage on the basis that Canac had not provided evidence that comparable LTD coverage was available. Justice Echlin also held that the LTD policy language that limited coverage to those employees “actively at work” did not disentitle the plaintiff to LTD benefits. This was because the law deemed the plaintiff to be a “notional employee” of Canac over the reasonable notice period.

Justice Echlin also ordered Canac to pay $15,000 in punitive damages for its “hardball approach”, noting that Canac had a track record of paying dismissed employees only their minimum statutory entitlements and aggressively litigating the resulting wrongful dismissal cases in the courts.

Brito is an important decision that can have serious implications for employers, especially those with an aging workforce. Here are some practical tips to keep in mind:

1. Always speak with your LTD insurer before terminating an employee. Not all insurance companies will continue LTD coverage for employees over the statutory and common law notice period. Some will end coverage on the last day of work or the last day of the statutory notice period.

2. Be prepared to pay more to get a release. If your insurer will not extend LTD coverage over the notice period, it becomes very important to obtain a release from the departing employee. In most cases an employee will not give their employer a release in exchange for their minimum statutory entitlements.

3. Provide reasonable notice. If the departing employee does not have a termination clause that limits his or her entitlements on dismissal, you should offer common law reasonable notice. You should also consider providing compensation in lieu of benefits coverage. Not only will this make it easier for you to obtain a release, it will help you avoid the “hardball tactics” label if you are forced to litigate.

4. Tighten up the employment contract language. As demonstrated in the Brito case, having policy language that requires an employee to be “actively at work” to qualify for benefits coverage may not be enough to limit your liability. Speak with your employment lawyer about revising the language in your employment contracts to clearly limit post-dismissal entitlement to LTD benefits coverage.

5. Have a back-up plan. In cases where the parties are unable to reach a settlement, you as the employer may want to arrange for alternative disability coverage with another insurer or provide compensation that would allow the employee to obtain alternative disability coverage.

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