2 August 2011

The HR Space: Declaration To "Make Employee Whole" Very Costly For Employers



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You give your employee almost 32 weeks pay after terminating his employment without cause.
Canada Employment and HR
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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.

The Facts

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 - 8 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 – 8 weeks.

Two weeks later, Mr. Olguin started another job, albeit at a lower payrate.  More importantly, the new employer did not provide disability benefits.  So when Mr. Olguin was diagnosed with cancer 16 months later and was no longer able to work, Mr. Olguin had no disability benefits.

The Surprising Decision

Not so surprisingly, the judge said that Mr. Olguin was entitled to 22 months pay in lieu of notice. Applying his "make whole" theory, the judge said Mr. 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.  This resulted in an award of approximately $53,000.

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

Surprisingly, that didn't end the matter.  The judge went on and awarded Mr. 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.  This 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 Mr. Olguin could have worked in any occupation, it was not successful.  And the judge didn't accept its argument that the disability insurer would not have allowed it to continue Mr. 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 that 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 impact judges in provinces right across the country.

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 where 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 will not allow coverage to continue following the statutory notice period.  So even if you want to continue coverage, that may leave you looking for alternate ways in which to do so.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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