Canada: Ontario Court Of Appeal: Early Termination Of Employee Benefits Carries Substantial Risk

A recent Ontario Court of Appeal decision confirms that employers may become liable to pay the full value of an employee's short-term and long-term disability benefit entitlements where, following an employee's termination without cause, those benefits are terminated and the employee becomes disabled within the notice period. The Court of Appeal also confirms that, in the appropriate case, an employee can collect both wrongful dismissal damages and disability benefits during an overlapping period.


Luis Olguin had been employed by Canac Kitchens for 24 years when he was terminated, without cause, in July 2003. On the date of his termination Mr. Olguin was 55 years old.

Canac Kitchens provided Mr. Olguin with his statutory entitlements upon termination, as set out by the Ontario Employment Standards Act, 2000 (ESA). These entitlements included eight weeks' pay in lieu of notice of termination, 24 weeks' severance pay, and the continuation of Mr. Olguin's benefits for an eight-week period. As is common practice among many employers, Mr. Olguin's benefits, including his short-term and long-term disability benefits, came to an end at the end of the eight-week statutory notice period.

Within two weeks, Mr. Olguin found another job, although it paid him a lower salary and did not provide him with any short-term or long-term disability insurance coverage.

Approximately 16 months after his termination, Mr. Olguin discovered he had cancer and underwent extensive treatment in the years that followed. During that time, he brought a claim against Canac Kitchens for wrongful dismissal, claiming damages for common law reasonable notice and the value of his lost benefits during the common law notice period.

The decision of the courts

The decision at trial

Mr. Olguin was successful at trial, receiving wrongful dismissal damages over a 22-month common law notice period. In addition, Mr. Olguin received the value of the short-term and long-term disability benefits that he was unable to collect because they had been terminated at the end of the statutory notice period (e.g., before the end of the common law notice period). The trial judge found that had the benefits not been terminated, Mr. Olguin would have been eligible to receive them based upon the medical evidence adduced at trial. Canac Kitchens was thus liable to compensate Mr. Olguin for that loss.

Mr. Olguin had paid a portion of the premiums for disability benefit coverage. As a result, the court awarded Mr. Olguin the full value of his short- and long-term disability benefits in addition to his common law entitlements during the notice period, even though this provided Mr. Olguin with a form of double recovery.

Furthermore, the court found that Mr. Olguin would have received long-term disability benefits until the age of 65. The result for Mr. Olguin was the receipt of an award of damages on account of lost long-term disability benefits beyond the end of the common law notice period until the date on which Mr. Olguin would have turned 65 years of age.

The court rejected the argument that Mr. Olguin should have applied for replacement disability benefit coverage in an effort to mitigate the loss of his benefits. Seemingly leaving open the possibility that such an argument would be successful in future cases, the court held that there was no evidence in this particular case that comparable coverage would have been available had Mr. Olguin sought it out.

In total, Mr. Olguin received an award in excess of $200,000 on account of his long-term disability benefits over an eight-year period and an award of approximately $9,000 on account of short-term disability benefits. Notably, as a result of statutory entitlements paid and mitigation earnings, Mr. Olguin's wrongful dismissal damages were only approximately $5,500.

In addition, the trial court awarded Mr. Olguin $15,000 in punitive damages.

Canac Kitchens appealed the trial decision.

The decision of the Court of Appeal

The Ontario Court of Appeal largely upheld the decision of the trial judge, finding that Mr. Olguin was entitled to receive a 22-month notice period as a result of his termination without cause. Accordingly, the court confirmed that Mr. Olguin was entitled to receive wrongful dismissal damages equivalent to his loss of income during this 22-month period, less statutory amounts paid by Canac Kitchens and amounts earned in his new employment.

In addition, the court upheld the trial judge's conclusion in respect of disability benefits, including that Mr. Olguin was entitled to receive an award for the value of his lost long-term disability benefits to the age of 65.

In coming to its decision, the Court of Appeal found ample medical evidence to demonstrate that Mr. Olguin was totally disabled within the definition of the long-term disability plan. Although the employer attempted to argue that Mr. Olguin did not participate in vocational rehabilitation and job search exercises that were prerequisites to obtaining benefits under those plans, the court found that it was unfair to expect him to do so in light of his complete disability.

The Court of Appeal found that Mr. Olguin was not entitled to punitive damages and overturned that aspect of the award.

Lessons for employers

This decision confirms that wrongful dismissal damages will not only include amounts attributable to lost wages during the common law notice period. Other benefits comprising the terms and conditions of employment – including insurance coverage – can be the subject of monetary awards to employees. More specifically, where an employee's insurance coverage is terminated by the employer prior to the end of the common law notice period, the employee may recover the value of those lost benefits from the employer. This may result in a form of double recovery for the employee – the receipt of an award of common law notice during a period of time for which the employee also receives an award for lost disability benefits. This is more likely to be the case where the employee pays for a portion of the benefit, for example, through premium contributions.

Notably, employees will still have to establish benefit entitlement by proving to the court that they would actually be eligible to collect the benefit they seek, under the terms of the applicable benefit plan. To do so, medical evidence will almost certainly be required. The corollary is that it remains open to employers to call evidence that the employee would not have been entitled to receive the benefits claimed.

Employers also remain able to argue that an employee should have mitigated the loss of disability benefits by applying for replacement insurance coverage. The onus will be on the employer to prove that such coverage exists and would provide comparable coverage to the employee.

This decision also highlights the discrepancy between ESA requirements and the obligations imposed by the courts. Simply put, while the ESA requires employers only to continue the benefits of a terminated employee for the statutory notice period, Ontario courts will award benefit entitlement throughout the entire common law notice period. An employer complying with the statute alone may, therefore, find itself unintentionally in the situation faced by Canac Kitchens.

Compounding these difficulties is the refusal of many insurers to continue employee benefits beyond the statutory notice period. While the trial court and the Court of Appeal found that Mr. Olguin would have been eligible to receive short- and long-term disability benefits had those benefits been continued, neither court makes it clear whether the insurer would have been willing to extend the benefits beyond the statutory notice period had Canac Kitchens attempted to secure benefits for Mr. Olguin.

In light of this decision, it is recommended that employers contemplating terminations without cause consult with employment counsel and their insurer before the dismissal to weigh the risks that may arise by the manner of termination.

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