Most short-term disability (STD) and long-term disability (LTD) benefits cease to provide coverage when the employee’s employment relationship is terminated or ended for any reason. This exposes the employer to a significant risk if the employee is terminated during the notice period.
This risk was amply illustrated in the 1992 British Columbia Court of Appeal decision in Prince v. T. Eaton Co. Ltd., which involved five employees who had all been terminated by Eaton’s at the same time. One of the employees, William Charlton, had 17 years of uninterrupted service. Eaton’s provided him notice on Jan. 28, 1983 that his employment would end March 25, 1983. This period was treated as “working notice,” although he was subsequently told he no longer needed to attend work. In addition, he received 34 weeks of severance pay.
On July 1, 1983 (within the severance period), Charlton was involved in a serious car accident that rendered him totally disabled until approximately December 1983. During the severance period, Charlton also suffered a recurrence of ulcerative colitis. Medical opinions supported his claim that the colitis had rendered him permanently disabled for the rest of his working life. Charlton sued for more notice and for the loss of disability benefits.
Both the trial and appeal courts agreed that Eaton’s was liable for the monetary value of any benefits, including disability benefits, that Charlton may have been entitled to during the notice period, but was no longer able to receive due to the fact that he had been terminated with only a monetary package. Charlton was awarded the present-value of approximately 24 years of disability benefits, subject to adjustments for the possibility he might recover his health and due to issues surrounding his life expectancy.
In contrast, the 2000 decision of the Ontario Superior Court of Justice in Pioro v. Calian Technology Services Ltd. offers employers a modicum of comfort. It found that the benefit handbook clearly advised employees that LTD coverage only covered employees who were actively employed and working more than 20 hours a week. The court found that this type of coverage was within the “generally accepted standards within the industry” and, accordingly, a terminated employee had no claim against his employer for loss of disability benefits. The Ontario Superior Court carefully distinguished the Eaton decision based on the specific differences in wording in the handbook and other related documentation.
The issue continues to pose difficulties for employers. On March 17, 2005, the decision in Keays v. Honda Canada Inc. (McIsaac J, Ontario Superior Court) was released.
The plaintiff, Kevin Keays, suffered from chronic fatigue syndome. He was forced to return to work after two years because the disability insurance carrier ruled that he was not “totally disabled.” His record of absenteeism was excessively high and he was ultimately terminated. In closing argument, the plaintiff ’s lawyer sought compensation not just for wrongful dismissal, but for “lost” disability benefits. The trial judge refused compensation on the technical grounds that the plaintiff ’s lawyer had not properly described his claim for the loss of disability benefits in the Statememt of Claim. The employer may have won the battle, but lost the war. Justice McIsaac assessed $500,000 in punitive damages against Honda Canada Inc.
Most employers prefer not to avoid the risk and expense of fighting these decisions in court. The sympathy of the court obviously lies with a recently-terminated employee who claims to be disabled. How can employers control this risk?
1. Vet the wording in employee benefit handbooks carefully. Make sure that employees understand that STD and LTD benefits will cease immediately upon termination, even if the employee is entitled to notice or compensation in lieu. Note that in Ontario, all benefits, including STD and LTD benefits, must be continued during the statutory notice period. Discuss continuation of disability benefits with the broker or insurance carrier in question.
2. Review any promises with respect to notice or compensation in lieu of notice very carefully. These promises may be made in an employment contract, employee handbook, or notice of termination. Simple promises of “salary and benefit continuation” will be interpreted in favour of employees and may expose the employer to uninsured risks. Clarify which benefits are being continued during the notice period and which are not.
3. Explore the possibility of obtaining “bridge” coverage. At least one specialty carrier in Canada, Reliable Life, offers a product that insures terminated employees during the “notice” period. This coverage is expensive and is subject to individual underwriting.
4. Revise the wording of releases. Ensure any releases executed by employees in exchange for a severance package explicitly release any claim for STD and LTD benefits against both the employer and its insurers.
Spelling out what is and isn’t covered will go a long way in protecting an employer should a terminated employee decide to sue upon becoming disabled.
P.A. Neena Gupta is a partner with Gowling Lafleur Henderson LLP in Waterloo, Ont.
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