Severance packages should include disability coverage

By Stuart Rudner

It has been eight years since the decision in Egan v. Alcatel, in which courts confirmed that in the absence of a contractual term to the contrary, employers must continue all benefits during the common law notice period — and that this includes disability benefits.

Since that time, several other decisions have followed suit, confirming that an employer cannot simply avoid its legal obligation due to the fact the insurance company will not continue disability coverage for an employee who is no longer actively working. In those cases, the employer has been held liable for the disability benefits that the employee would have received from the insurer, which can amount to hundreds of thousands, or even millions of dollars. Despite this huge potential liability, employers continue to cut off disability benefits either at the time of termination, or at the end of the statutory notice period (since statutes such as Ontario's Employment Standards Act, 2000 were amended to get around the wording in disability policies that brought coverage to an end once an employee was no longer actively employed).

As I explain to every dismissed employee that retains our firm to review a severance package, by law, all forms of compensation are to continue throughout the notice period as if the employee was still working. In other words, packages that offer to continue base salary only are insufficient, unless the employee did not receive any other form of compensation.

Otherwise, bonuses, commissions (based upon anticipated earnings), car allowances, stock options, medical, dental, disability and other benefits should all continue unless there is clear wording in a contract or enforceable policy or plan that says otherwise. This has been the case for decades and, somewhat amazingly, seems to have remained below the radar until the Alcatel case. In other words, even though employers should have been providing disability coverage during the notice period, they were not — and this does not appear to have been questioned with any frequency at all.

At this point, the law is fairly clear: Unless an employer has protected itself by including clear wording in the employment contract to confirm that disability coverage will end at the end of the statutory notice period, if coverage ends during the relevant notice period, and the employee becomes disabled, the employer will effectively become the insurer and be on the hook for any benefits. Nevertheless, employers do not seem to have gotten the message, since I can count on one hand the number of severance packages that I have reviewed that did not cut off disability coverage prematurely.

Tips for employees

If you are an employee who has been dismissed with a severance package, you should be mindful of the details of the offer. While many people focus on the amount of time ("How many months did you get?"), what is being offered during that time is equally important. As I often explain to clients, 18 months of base salary is only worth nine months if the individual's compensation was split evenly between salary and variable pay. Furthermore, the specific benefits that are being continued should be reviewed carefully.

If, as is still the norm, the severance package indicates that disability coverage will end at the time of termination or at the end of the statutory notice period, but your entitlement to notice is greater, then you should attempt to negotiate this point. Without fail, if you ask that disability coverage be continued, the response you receive will be that the insurance company will not permit this. However, I have often been able to successfully negotiate an agreement whereby the employer will compensate the employee for the loss of that benefit in order to assist them in paying for alternate coverage. There are insurance companies that, having seen this business opportunity, will offer "transitional coverage" for dismissed employees. Otherwise, you take the risk that if you become disabled, you will not have any income replacement while you are unable to work. As a result, this is not an issue that should be ignored.

Tips for employers

For employers, the best way to protect yourself from this liability is to address it up front by including clear language in the employment agreement which provides that disability coverage will end at the conclusion of the statutory notice period. If it is too late to do so, and you are unable to obtain a full and final release from the employee before disability coverage ceases, you should consider arranging alternative coverage for the employee, so that you do not become the insurer and expose yourself to substantial liability if they become disabled.