What benefits should be included in severance packages and how can an employer mitigate its costs?
There are many factors to consider when terminating an employee – is it a layoff or for just cause, what are the statutory rules regarding proper notice or pay in lieu of notice? Also, what benefits should be included in severance packages and for what period of time?
Provincial Employment Standards Acts require that an employee who is terminated without just cause be provided a minimum amount of prior notice, or pay in lieu of notice, depending upon the employee’s length of service with the organization. Benefits, such as long term disability (LTD), extended health care and dental care, should be extended to match the required statutory notice of termination period as they are generally considered to be a form of compensation. Common law notice is not the same as statutory notice, but it’s the one you should really pay attention to.
Another factor that you should consider is how the courts are responding to questions of liability when the “common law notice period” is longer than the statutory notice. In a recent case in Ontario[i], a 55-year-old employee worked for a company for 24 years and was terminated without cause and without working notice. In lieu of notice, the company paid the employee the minimum severance amount equalling eight weeks wages and extended the disability benefits by eight weeks from the last day of active work. The judge in the case found that the employee was in fact entitled to common law reasonable notice of 22 months. This meant that when the employee was diagnosed with cancer 16 months after his last day of active work, and became unable to engage in any work, the employer became liable for the payments that the employee would have received under the LTD benefit until age 65, nearly $200,000. Even though the employee was not “actively at work”, he was considered a “notional employee” over the reasonable notice period and therefore still entitled to benefits. The company was also ordered to pay $15,000 in punitive damages for their “hardball approach” in limiting payments to terminated employees to minimum statutory requirements and then aggressively litigating wrongful dismissal cases.
This situation can be avoided by following a few simple steps BEFORE terminating an employee without just cause. Here are a few tips: Always contact your Client Service Representative to confirm what benefits, including LTD, can and will be offered to a terminated employee. Generally, benefits extensions of one week per year of service to a maximum of eight weeks are allowed, provided the extension complies with your provincial Employment Standards Act. Disability and out-of-country emergency travel assistance benefits may not be extended beyond eight weeks. You may need to pay more in order to obtain a release from your terminating employee. If your notice period is longer than the minimum statutory requirement, you may need to add compensation in lieu of benefits in order to obtain a release. This would also help avoid the accusation of “hardball tactics” if there was ever a need to defend the organization from litigation. Provide reasonable notice of termination. If your employee does not have a termination clause that limits compensation on dismissal, consider offering the common law reasonable notice and providing compensation in lieu of benefits. Ensure you have an employment contract in place and that it includes a termination clause. If your employment contracts don’t already do so, ensure there is language included that clearly limits post-dismissal entitlement to benefits. Have alternatives at the ready. You and your terminating employee may not be able to come to a settlement. In such cases, consider arranging alternative disability coverage with another insurer or providing compensation for terminated employees to replace their LTD coverage. If you have questions around severance, you should contact an employment lawyer. Requests to extend benefits after termination can be denied, so be sure to make these requests in advance.
For over 20 years, Chris Pryce of Human Capital Benefits has been advising employers on all aspects of managing employee benefits programs and related products. If you have any questions, you can contact Chris at 416.924.8280 or by email at firstname.lastname@example.org
 Source: Malcolm MacKillop and Hendrik T. Nieuwland, Employers can be liable for long term disability benefits, Snap Shot Employment & Labour Law Bulletin, March 11, 2011 http://www.djmlaw.ca/snapshot.asp