Canada: The Continuing Evolution Of Workplace Disability Law: Two Provincial Courts At Odds On The Deductibility Of Disability Benefits From Severance Pay

Workplace disability poses many practical and legal challenges for employers. Employers must balance their own business interests with an employee's right to be accommodated and treated fairly and with respect. For many employers, there is a great deal of uncertainty surrounding their right to terminate an employee on disability leave and the legal consequences that follow. Adding to the complexity of these issues are the 2014 British Columbia decision Morris v. ACL Services Ltd and the 2015 Ontario decision Ciszkowski v. Canac Kitchens. The B.C. and Ontario courts in these cases took two different approaches on whether disability benefits can be deducted from severance pay when an employer terminates an employee who is already receiving disability benefits.

Background

The Supreme Court of Canada considered this issue in 1997 in Sylvester v. British Columbia. In that decision, the Court established that the deductibility of disability benefits from a damages award depends on the employment contract and whether the parties intended that the employee would receive both disability benefits and damages in lieu of adequate notice of termination.

In Sylvester, the Court ultimately concluded that it was incompatible under the employment contract for the dismissed employee to receive both amounts. The Court noted the employee's contractual right to damages in lieu of reasonable notice presumes he would have worked during the notice period, while his entitlement to disability benefits only arose because he was unable to work. Therefore, this suggested the parties did not intend for the employee to receive both damages and disability benefits.

The Court's approach in Sylvester recognizes the public policy of preventing "double recovery" where an employee would be compensated beyond his or her actual loss if disability benefits were not deducted from an award of damages. In principle, the policy of preventing double recovery is clear and concise. However, recent court decisions have shown that it may be difficult in practice to determine whether double recovery is engaged.

The British Columbia Approach

In Morris v. ACL Services Ltd., the Court found the payment of premiums by an employee is a relevant factor but not determinative of the parties' intentions under the employment contract. Here, the employee's participation in the third-party insurance plan was mandatory, and coverage under the plan was dependent on active employment. Moreover, the reason the employee himself paid the premiums was to ensure that any payments made under the plan were not taxable. Since the disability benefits were ultimately intended to serve as income replacement for regular wages, the Court found this would be a case of double recovery if disability benefits were not deducted from the damages award.

The Ontario Approach

In Ciszkowski v. Canac Kitchens, the employer sought to deduct disability benefits from an employee's claim for wrongful dismissal damages. In that case, the employee and employer had contributed equally to the third-party insurance coverage that resulted in the long-term disability benefits being paid. The employer sought a deduction of 50% of the disability benefits received by the employee.

The Court found in favour of the employee and held that double recovery was not engaged in cases where benefit premiums were paid equally by the parties. Relying on previous Ontario decisions, the Court found it was reasonable to infer that the parties would agree an employee should retain disability benefits in addition to wrongful dismissal damages where the employee has effectively paid for the benefits in question. The Court distinguished this case from Sylvester where the disability benefits were provided directly by the employer, as opposed to a third-party insurer.

The contrasting approach by our courts to the same legal issue shows that the law in this area is continuing to evolve. As new cases emerge, the application of the double recovery principle will be narrowed and better defined. Ultimately, the deductibility of disability benefits turns on the intentions of the parties. Therefore, employers may want to incorporate specific terms in their employment agreements to clarify their obligations if they decide to terminate an employee on disability leave. Our lawyers can assist you in reviewing and updating your employment agreements.

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