Terminating an employee’s employment without cause in Canada comes at a price. The various employment acts and codes set out the requirements for termination notice or pay in lieu of notice (and in Ontario and federal workplaces, severance pay in addition to termination pay). The required termination period will range from 1 to 8 weeks, depending on the length of service of the employee, and depending on the province (plus severance pay, if applicable).
But what are an employer’s obligations during the notice period besides payment of wages?
The Statutory Requirements
Employment statutes in Canada require an employer to pay wages/salary for the notice period, as well as to continue benefit contributions. In Ontario, the Employment Standards Act requires an employer to continue the employee’s wages and terms of employment, and to:
"continue to make whatever benefit contributions would be required to be made in order to maintain the employee’s benefits under the plan until the end of the notice period."
Notice period obligations, therefore, include the payment of whatever benefits the employee was otherwise entitled to, including benefits such as group health care and dental premiums, life insurance, LTD, STD and travel insurance. When crafting a termination package for an employee who has been terminated without cause, the package must include the continuation of benefits throughout the statutory notice period.
The problem employers run up against is to what extent will the insurance companies continue to insure benefits after an employee is no longer "actively" employed. Most seem to recognize the statutory obligations for general benefits like health care and dental, but some do refuse to insure the bigger ticket items like LTD or life insurance after an employee’s last day of active employment.
At the end of the day, it is the employer who is obligated to provide benefits during a notice period, not the insurer. The insurer is simply obligated to satisfy the terms of the contract between it and the employer.
And then there’s the Common Law
The gap between what is required and what is actually insured during the notice period becomes even greater for the common law notice period. The employment statutes set out minimum employment standards. The courts will almost always award significantly more damages than the statutory minimum for a wrongful dismissal (i.e. a termination without cause without notice).
For example, a judge would award a 62 year old supervisor with 15 years service at the company damages of many more weeks than the 8 weeks of termination pay and 15 weeks of severance pay required under the Ontario statute. Assuming no other issues such as age discrimination (unlikely!), the notice period would probably be in the range of at least a year, and possibly more given the age of our hypothetical employee.
Assuming that the notice period is a year in this example, the case law makes it clear an employer is required to make the employee whole for the entire year’s notice period. In other words, the employee will be entitled to whatever she would have earned had the termination not occurred. This includes for example, any regularly scheduled wage increases, any non-discretionary bonus tied to company performance, and the continuation of all benefits.
The Insurance Gap in the Case Law
If the insurance company refuses to continue to insure the terminated employee beyond the 8 weeks statutory notice period, the employer is on the hook if our hypothetical terminated employee needs to access the benefits in weeks 9-52, after the statutory termination notice period expires.
As an example, in Alcatel Canada Inc v Mary Egan, the Ontario Court of Appeal upheld the notice period of 9 months awarded to a director-level, senior management employee with 21 months service (she was induced from prior employment). The employee was terminated without cause on July 3 as part of a mass termination, and on November 27, she was diagnosed with a major depressive disorder, which the court held had commenced on October 1. The statutory notice period was long over when the disability arose, and all benefits, including the STD and LTD benefits were cancelled at the end of the statutory notice period. The employee was denied disability benefits when she applied during the common law notice period because the coverage had already been cancelled.
In that case, a particular problem for the employer was that the STD and LTD policies provided that the employer, not the insurer, determined when coverage was to be terminated. The Court of Appeal upheld the trial judge’s finding that because the disability arose during the notice period, and because the employer "wrongfully discontinued her coverage prior to the onset of disability", the employer was therefore liable for any resulting loss. The employer was liability for the value of the disability benefits that would otherwise have been paid – not just the benefit premiums.
Also important to note in this case was that the employer’s obligations actually exceeded the awarded notice period. The court held that the employee was entitled to recover damages for the entire period of disability, regardless of when the notice period ended. In this case, the disability ended when the employee recovered 6 months after the notice period ended. The end result was that the employer was found liable for $146,825.98, plus costs of $25,000 to the plaintiff employee.
The employer got lucky here. Had the employee not recovered from her disability, the amount would continue for that length of time the insurance policy would have covered her, had the policy not been terminated during the notice period. This employee was 40 years old – there could have been another 25 years of liability.
In Brito v Canac Kitchens, the employee became permanently disabled and did not recover. After 24 years of service, the employee was diagnosed with cancer at age 55, deemed totally disabled by his doctors, and was awarded the LTD benefits he should have received had the benefits not been cancelled at the end of the statutory notice period. The court awarded the employee damages for lost income for 22 months, STD benefits for 17 weeks, and LTD benefits thereafter to age 65, plus costs of $20,000. Again, the employee was awarded not just the benefit premiums, but the cost of the benefits themselves for over 10 years.
Penny Wise Pound Foolish
I find some employers are reluctant to continue the "expensive" premiums during a notice period and are willing to gamble that their otherwise healthy and vibrant employee will stay well. But should anything happen to your terminated employee during the common law notice period, as the above cases indicate, those premiums all of a sudden look like a bargain.
Contracting out of the Statute
A proactive way to avoid the above scenarios is to enter into an employment contract when the employee starts. While this doesn’t solve the problem with your 20 year employee who started at the company before you started using employment contracts, it does provide clarity for new and future employees. The vast majority of employment law cases are a dispute around termination entitlements, and a reasonable and clearly drafted termination provision can usually avoid the problem upfront.
Provided the parties exceed the minimum statutory standards (i.e. provide more than the termination and severance payments set out in the statute), the termination provision can carve out and contain the entitlements on termination. For example, if the contract provides three weeks of salary for every year of service, it is permissible for the contract to then provide that benefits will cease two months after the last day of active employment.
But should you contract out of providing benefits during the notice period?
As long as the provision in the employment contract exceeds the statutory minimum, freedom of contract prevails. From a practical point of view, however, if the insurance company permits, providing benefits during the full contractual notice period is often highly desirable for the employee, especially if he or she has a family or is older and has some health issues.
Continuing to pay monthly premiums may be a small price to pay for a cooperative former employee who doesn’t try to challenge the contract on some other basis, who is able to leave the workplace with certainty around their family’s benefit coverage, and is able to deal with a medical emergency that may arise following termination while looking for a new position. This will particularly be a big selling point for older employees given the end of mandatory retirement in Canada.
Ultimately, it will be a matter of choice and market demands when entering into the employment contract upfront, well before the parties are contemplating any health issues.
How does your workplace deal with benefits during the notice period? Is it standard to offer, or do employees have to bargain for it?
[As with all of my posts, the above is not legal advice, but rather, legal information. As soon as benefit insurance issues are involved, there are many caveats, contractual exceptions and contextual variations to many situations. If benefit coverage is a specific issue for you, before making any decisions regarding termination, I would contact your workplace insurance company to clarify what are the policy’s terms and conditions.]