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Discussions relating to employees’ entitlements upon termination of employment tend to focus on the reasonable working notice or pay in lieu (“severance”) aspect. Too little attention is given by employers to the issue of the value of the benefits lost as a result of the termination.

The loss flows from the manner in which the employee’s benefits coverage was brought to an end. When (rather than providing reasonable working notice of termination) the employer chooses to terminate abruptly, the pitfalls relating to the cessation of benefits arise.

The problems occur because the language of disability insurance plans generally is not consistent with employers’ common law obligations towards their employees. Disability insurance coverage usually halts immediately upon the employee ceasing to be actively employed. The employer’s common law obligations toward the employee, however, are based on the premise that the employee must be made whole for the loss of the entire reasonable notice period.

During the reasonable notice period the employee is entitled to the benefit of all the usual employment perquisites, including disability insurance. Hence, what I call the disability gap occurs – the employer should provide benefits coverage during the notice period but the insurance coverage will normally have been halted according to the terms of the insurance plan.

So, if the employee becomes disabled during the notional working notice period, the disability insurance is no longer available to provide wage-replacement benefits. As a result, the employer may be held liable for any benefits payments the employee would have enjoyed had she been given working notice.

The same risk arises when the employer chooses to dismiss the employee summarily for just cause reasons. If the just cause grounds are rejected by a court, the employer will be liable for the lost benefits in the event of a disability arising during the notice period.

The employer effectively steps into the shoes of the insurer for as long as the benefits payments would have been paid. Unless the employer happens to be an insurance company, this tends to be an unhappy place to be.

In Ontario, a few years ago, just such an instance arose. Alcatel Canada Ltd. was sued by a former employee, Mary Egan, for wrongful dismissal. The court found that Ms. Egan was entitled to a reasonable notice period of nine months’ duration.

It also determined she had become disabled, as a result of a major depressive disorder, during the notice period. The court found that, had the employer given her the nine months’ working notice to which she had been entitled, the disability coverage still would have been in effect when she became disabled.

The court confirmed “the law is clear that dismissed employees are to be kept whole throughout the entire reasonable notice period during which period employees are entitled not only to the continuation of salary but the continuation of all forms of employee benefits”.

Another, more recent, Ontario court decision has confirmed the employer’s liability in these circumstances.

Luis Olguin was employed by Canac Kitchens for 24 years before his employment was terminated. He was provided with only the minimum, statutorily-required, pay in lieu of notice and his benefits were continued for eight weeks. Eighteen months later, he was diagnosed with cancer.

Olguin sued for wrongful dismissal damages, including lost benefits, and won an award representing a 22 month notice period. That being the case, had he actually been provided with reasonable working notice his STD and LTD benefits coverage would still have been in place when he became ill.

That coverage was, due to the method of termination, no longer in place and Olguin was awarded STD and LTD benefits through to age 65. In addition to the lost wages portion of the damages, the award for lost disability benefits totaled close to $260,000.

The best way for employers to eliminate this risk of liability is to implement binding employment contracts expressly terminating the entitlement to benefits upon cessation of active employment. The employer may also simply provide reasonable working notice and (as required) continue all the employee’s benefits during that period.

Alternatively, the employer can purchase temporary insurance to bridge the gap in coverage (such insurance, however, can be difficult to obtain and comparatively expensive to purchase).

Avoiding the disability gap is one aspect of terminations which, if handled poorly, can result in significant liability for the employer. As in many aspects of employment law, it is a liability which can be eliminated through proper planning and the use of employment contracts.

Robert Smithson is a labour and employment lawyer, and operates Smithson Employment Law in Kelowna. For more information about his practice, or to subscribe to You Work Here, visit This subject matter is provided for general informational purposes only and is not intended as legal advice.