Benefits & Pensions
What are the unknown risks of group benefits and life insurance for terminated employees?
By John Hyde
Negligent misrepresentations regarding benefits can be costly
By John Hyde
EDITOR’S NOTE: ‘Legal steps & missteps: Addressing common workplace concerns’ is a weekly Talent Canada series, in partnership with John Hyde of Hyde HR Law in Toronto. This series takes a deeper look at issues in which organizations can be proactive to prevent legal issues and highlight where common errors occur.
Although Canadian employers are not required to provide private health benefit plans to their employees, almost every Canadian company does — to some extent. It is so pervasive that it has become expected in the marketplace.
A comprehensive benefits plan can be an important component in attracting high-end talent.
While companies are attuned to the competitive advantage of such plans, less attention is often paid to the significant legal obligations that are triggered once benefits are provided.Advertisement
In fact, the benefits plan can be a significant source of legal missteps and liability from the time an employee is hired to years after the employee has left the organization.
Underpromise and overdeliver
When discussing a benefits plan with a potential hire, employers must be vigilant about any representations they make to the employee regarding such a plan.
If they provide incorrect information to the employee, even before they ever sign an employment contract, the organization can be on the hook for the difference in what benefits the employee thought they were eligible for, and what benefits they are in fact eligible for.
This was the situation a British Columbia company found itself in when an employee with cystic fibrosis inquired about eligibility for long-term disability benefits prior to signing his employment contract. A representative from the company misstated the eligibility criteria.
When the employee eventually required those benefits, he learned that the eligibility criteria was different than what he was led to believe. Following the employee’s termination, the court awarded him over $80,000 in damages for the company’s negligent misrepresentations regarding the benefits.
The company could have avoided this misstep by providing correct information when the employee was hired and by ensuring that the employment contract precluded such a claim.
Once employers begin paying into private benefit plans for their employees, doing so becomes a contractual obligation owed by the company to the employee. Employers also have statutory obligations under employment standards legislation to continue making those payments.
The fact that the benefit plans are administered by a third-party insurer does not entitle the company to simply stop providing those benefits to an employee. If an organization does so, employees can argue that the company has violated its statutory and/or contractual obligations and that such violation amounts to a termination of employment.
Employers can then be on the hook for significant termination entitlements to those employees, as well as penalties for breach of their statutory obligations.
Benefits upon termination
When terminating an employee without cause, Canadian employers are required to continue providing benefits for a minimum period of time, as set out in the applicable legislation. In Ontario, for example, an employee with eight years of service or more would be entitled to continue receiving their benefits for at least eight weeks.
Employers’ obligations at “common law” (judge-made law) are more complex.
In light of recent decisions from Canada’s highest courts, employees are now entitled to wrongful dismissal damages far exceeding those set out in the applicable regulations, or which were initially contemplated in their employment contracts.
Those entitlements extend to benefits, as well. For example, if an employee is entitled to 10 months of reasonable notice/termination pay, and there is no contractual term that clearly limits their entitlement to benefits over their notice period, the legal obligation is to provide benefits throughout the 10-month notice period.
The difficulty for many organizations is in reconciling their common law obligations with the insurance companies.
Many insurance policies will terminate an employee’s benefits at the end of the statutory notice period only, and will not provide any coverage for the much longer common law notice period. This gap can be potentially devastating to organizations.
Canadian courts have confirmed that, where an organization has a legal obligation to provide benefits during the notice period and fails to do so, the organization steps into the shoes of the insurer and becomes responsible for the underlying payments to the employee.
Such an outcome can result in an organization being liable for hundreds of thousands of dollars to an employee who becomes disabled during the notice period.
This risk has increased dramatically during the COVID-19 pandemic, when terminated employees have been more likely to become critically ill during the notice period.
For these reasons, it is imperative that employers not only properly outline the scope of benefits, but also update their employment contracts regularly, in order to clearly set out exactly what benefits employees can expect to receive upon termination, and for how long.
Failing to do so can be a critical, yet avoidable, legal misstep.
John Hyde advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.
Oren Barbalat, an associate at Hyde HR Law, co-wrote this commentary.
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