A typical feature of modern employment contracts is that, after a suitable waiting period, the employee may participate in a group employee benefit plan. Such plans may include short- and long-term disability coverage for which the employee may be required to contribute to the premium payments—usually by way of a paycheque deduction. While this arrangement may be a win-win situation during the course of employment, it can present serious problems when an employee is terminated and in receipt of severance unless an employer is aware of the specific terms of the disability plan.
Severance Payments
Severance is paid when an employee is dismissed without cause. In general terms, it represents the damages payable by the employer for its breach of the employment contract, calculated by the payment of a sum equal to the salary the employee would have earned during the reasonable notice period. Typically, therefore, a termination notice will specify the number of weeks or months comprising the notice period and will pay severance for that time period—either by way of a lump sum or salary continuance.
Disability Coverage After Employment Termination
In addition to severance, employers may choose to continue some employee benefits during the notice period. Providing disability coverage during this period, however, may be problematic because many policies state that the employee must be “actively at work” (or similar types of wording) when the disability arises in order to trigger coverage.
Disability Coverage May Not Continue During Notice Period
The corollary is that such plans usually do not provide coverage when employees are terminated —they are not actively working but are nevertheless receiving a salary, albeit in the form of severance. As a result, many termination notices provide for payment of severance and, possibly, other employment benefits during the course of the notice period but specifically provide that disability coverage (and usually accidental death and dismemberment coverage) ceases on the last day worked.
Employers Can Be Held Liable For Terminated Employees’ Disability Payments
While limiting disability coverage to active employment may make sense from an insurance perspective, it can be extremely problematic from the employer's perspective. The reason for this is that, at law, in a without-cause termination, the employee is entitled to be put in the same position he or she would have been if the employer had not breached the contract of employment.
If the employee was still working during the notice period, he or she would have retained their entitlement to disability benefits if coverage was triggered during that period. But, on termination and cessation of this coverage, those benefits are often no longer available.
This type of situation has arisen in a number of cases in Canada in which the courts have held employers liable to pay the insurance benefits that would otherwise have been payable if the employer had not prematurely ended the employee's entitlement to those benefits on termination.
In a worst case scenario, an employer of a young and well-paid employee who became permanently disabled during the notice period could potentially be held liable to pay the present-value equivalent of benefits to age 65 if those benefits were discontinued on termination.
Although there are a number of decisions which have held employers liable for the payment of damages equivalent to such benefits, these cases have received comparatively little attention. As P. R. White observed in an article entitled “The Black Swan in Employment Law–It’s Not Just in Theatres Anymore”:
The vast majority of employers . . . are unaware that they have made a decision to enter the insurance business themselves when they prematurely cancel the dismissed employee’s benefits with an outside insurer.
In summary, employers should ensure that they are adequately protected from this potential liability and, when terminating employees without cause, explore more flexible options such as limited individual or conversion policies that would extend coverage for the notice period.
For more information on disability coverage for terminated employees and employment law in general, please contact
Barbara Cornish..............................bcornish@singleton.com