Northern Exposure

Declaration to ‘Make Employee Whole’ Very Costly for Employers

By Karen Sargeant

You give your employee almost 32 weeks’ pay after terminating his employment without cause. He gets another job two weeks later. You’re off the hook, right? Maybe not.

The Ontario Superior Court of Justice in Brito v. Canac Kitchens, a Division of Kohler Canada Co. has recently said no. Instead, you may be required to “make the employee whole” in every respect, not just salary. That could mean disability benefits too, even after he starts his other job.

In this case, Luis Olguin was dismissed because of restructuring. He was 55 years old at the time and had nearly 24 years of service. At the time his employment was terminated, he was provided with the statutory minimum — eight weeks’ pay in lieu of notice and 23.79 weeks’ severance pay under the Ontario Employment Standards Act. His benefits were continued for the statutory minimum as well — eight weeks.

Two weeks later, Olguin started another job, albeit at a lower pay rate. More importantly, the new employer didn’t provide disability benefits. So when he was diagnosed with cancer 16 months later and was no longer able to work, he had no disability benefits.

Surprising decision
Not so surprisingly, the judge said that Olguin was entitled to 22 months’ pay in lieu of notice. Applying his “make whole” theory, the judge said Olguin was entitled to the difference between his pre-termination earnings and his earnings at his new employer (less the 31.79 weeks’ pay he received from Canac Kitchens) from the date of termination to the date of his disability. That resulted in an award of approximately $53,000.

The judge then considered the six-month period from the date of Olguin’s disability to the end of the 22-month notice period. He concluded that had Olguin been provided with 22 months’ working notice, he would have been eligible for short-term disability benefits during that six-month period. Olguin received those benefits.

Surprisingly, that didn’t end the matter. The judge went on and awarded Olguin the long term disability (LTD) benefits he would have been entitled to receive from Canac Kitchens’ disability insurer had he been provided with 22 months’ working notice. That amounted to $146,723 from the date LTD benefits would have started to the start of the trial and a further $47,941 representing the present value of the LTD benefits from the start of trial to his 65th birthday. That’s more than $200,000 in what would have been paid by an insurer to be paid by Canac Kitchens.

Canac Kitchens argued that the LTD benefits should stop after two years, the start of the “any occupation” period. Because it didn’t lead any evidence that Olguin could have worked in any occupation, the employer wasn’t successful. And the judge didn’t accept its argument that the disability insurer wouldn’t have allowed it to continue Olguin’s coverage even if it had tried to do so. That wasn’t enough to get Canac Kitchens off the hook.

What this means for employers
At first blush, this decision may appear consistent with the 2006 decision in Alcatel v. Egan.  In that case, the Ontario Court of Appeal said that employers will have to step into the shoes of the disability or life insurance carrier should it fail to provide such benefits during the entire notice period and the individual becomes disabled or dies.

But this decision goes even further. It says the obligation doesn’t necessarily end when the terminated employee starts another job. Instead, employers may still be on the hook for any damages the employee doesn’t mitigate — like disability benefits in this case. Although a decision from Ontario, it could have an impact on judges in provinces across Canada.

Of course, this doesn’t happen in every case. It only becomes an issue where the former employee dies or becomes disabled. That leaves employers assessing the facts on each termination, deciding whether to take the risk of not providing coverage.

Employers must now make that assessment even when the former employee starts another job if the new job doesn’t match the employee’s former benefits. Complicating matters is that most disability insurers won’t allow coverage to continue following the statutory notice period. So even if you want to continue coverage, you may need to look for alternate ways in which to do so.

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