Severance pay for disabled workers

In-depth look at landmark Ontario Court of Appeal decision and what it means for employers

Background: ‘Drastic’ changes for disabled employees

In the Feb. 18, 2004, issue of Canadian Employment Law Today, Stuart Rudner wrote about a landmark Ontario decision that meant employers would have to pay severance pay when it loses an employee due to disability.

“Up until recently, the doctrine of frustration relieved an employer of its obligations to provide severance pay and notice or pay in lieu,” wrote Rudner. “However, if the recent decision is not overturned, the law will require an employer in those circumstances to provide severance pay to the employee. Since severance pay can be as much as half a year’s salary, this obligation can be successful.”

On May 4, the Ontario Court of Appeal upheld the decision in a ruling that could have wide-ranging implications for employers across the country if other jurisdictions rely on it.

The case

Employers in Ontario now have to pay severance to workers who can no longer carry out their jobs because of a disability.

The Ontario Court of Appeal, the highest court in the province, said a section of the Employment Standards Act that exempted employers from paying severance to a worker whose employment contract had been "frustrated" because of an illness or injury is unconstitutional and no longer in force.

Stuart Rudner, an employment lawyer with Miller Thomson in Toronto, said the ruling means employers are now on the hook for severance when a contract is frustrated due to injury or illness and, considering severance can be as high as 26 weeks' wages, the cost to employers could be significant.

The case involved Christine Tilley, a neonatal intensive care nurse at Mount Sinai Hospital in Toronto. She was let go on June 15, 1998, after 13 years on the job because she was no longer able to perform her job because of a disability.

In the summer of 1995 she injured her knee while water-skiing. After a number of unsuccessful attempts to return to work, she suffered a relapse in January 1996 and was awarded long-term disability benefits. In June 1998 Mount Sinai terminated her employment for innocent absenteeism due to her disability. Just prior to being terminated, Tilley's doctor told her she would eventually be able to return to work but was unable to estimate when.

Because Tilley's employment contract was frustrated by a ¬disability, the hospital provided her with no severance. Her union, the Ontario Nurses' Association, filed a grievance disputing the termination and claiming the denial of severance violated the Canadian Charter of Rights and Freedoms.

An arbitration board found Tilley's employment had been frustrated and upheld her termination. It rejected the argument that the denial of severance based on disability was a violation of the charter.

But the union appealed that decision and won its case before the Ontario Divisional Court. The employer appealed that ruling to the Ontario Court of Appeal, which handed down its ruling May 4.

The hospital, with Ontario's Attorney General as an ally, argued severance pay is designed predominantly to compensate employees for losses "going forward." Since employees whose contracts have been frustrated due to illness or injury are unlikely to re-enter the workforce, denying them severance pay is not discriminatory, it argued.

But the hospital admitted that one of the other purposes of severance pay is to compensate employees for past contributions to the employer's business. The union also pointed out part of the legislation grants severance pay to employees who die before they receive notice of termination.

"The fact that such employees receive severance is not consistent with providing compensation to employees who remain in the workforce," wrote Justice Russell Juriansz in the decision.

The court also said the notion that a disabled worker can't participate in the workforce is an "impermissible stereotype."

"Things change. Employees with permanent disabilities may undergo retraining and acquire new skills, and new devices and techniques of accommodating special needs may be developed," wrote Justice Juriansz. "Employees with temporary disabilities may recover and be able to return to work, even if their conditions persisted long enough to result in the frustration of their former employment contracts."

Tilley, in fact, did find a new job after being let go by the hospital, the court said.

Why get rid of a worker on LTD?

Although an injured worker who is receiving LTD benefits will still be entitled to long-term disability when fired, there are a couple of reasons why an employer would want to get rid of an employee like Tilley, said Peter Israel, an employment lawyer with Goodman and Carr in Toronto.

"The point, from a financial perspective, is simply the continuation of benefit coverage," said Israel. "An employee who is on long-term disability is continuing to accumulate whatever entitlement there is to benefits and benefits coverage."

It's also tough for employers to make long-term staffing decisions when they have to keep a position open in case the disabled worker is able to return at a later date, he said.

Elizabeth McIntyre, the lawyer who represented the Ontario Nurses' Association, said once an employee is off the books, the employer no longer needs to worry about accommodating that worker if and when she is able to return to work.

McIntyre said she was happy with the decision and hopes companies will take extra steps to accommodate disabled workers rather than simply terminate them.

"There are employers out there that don't take that responsibility seriously," said McIntyre, a lawyer with Cavalluzzo Hayes Shilton McIntyre & Cornish LLP. Now if an employer decides it's necessary to terminate a disabled employee who is no longer able to work, it will have to take severance pay into account, she said.

Ontario first jurisdiction to force employers to pay severance

Phil Brake, national co-ordinator for the Canadian Injured Workers Alliance, said Ontario is now the first jurisdiction in the country to force employers to pay severance to a worker who can no longer do the job because of a disability.

"It's a real step forward to get severance pay, because we haven't had it in any other province," said Brake, adding that he hopes companies will take more steps to accommodate disabled workers.

What Ontario’s legislation says

Under Ontario’s Employment Standards Act, employers with a payroll of $2.5 million or more are required to pay severance to an employee with more than five years of service.

Employers who have terminated 50 or more employees in a period of six months or less, and the terminations are caused by the permanent discontinuance of all or part of the business, must also pay severance to employees with more than five years of service.

Section 58(5)(c) states that severance pay is payable to an employee “who is absent because of illness or injury, if the employee’s contract of employment has not become impossible or has been frustrated by that illness or injury.”

The amount of severance an employee is entitled to is calculated using a formula based on the worker’s regular wages multiplied by the number of years and months of employment. The total amount cannot exceed 26 weeks’ regular wages.

No reason to treat injured workers different

The Court of Appeal couldn’t get beyond the basic argument that there was no compelling reason to treat disabled employees differently than healthy ones when it comes to severance pay.

Ontario’s attorney general joined the fight in an attempt to defend the legislation, stating that the objective of the severance pay provisions in the Employment Standards Act is to “ease the financial needs of those who lose their jobs but who are likely to find alternative employment, albeit at reduced compensation.”

The attorney general also said that in reviewing legislative choices in the areas of economic and social policy, courts should show substantial deference.

Justice Juriansz said the government is entitled to balance the interests of employers and employees by limiting the availability of severance pay, but was not convinced this objective was compelling enough to override the rights of disabled persons to equal treatment in employment.

“There is no rational connection between the objective of granting severance pay to those employees who will rejoin the workforce and the law which denies severance pay to employees whose contracts have been frustrated due to illness or injury,” said Justice Juriansz.

He said since severance pay is intended to ease the transition of employees to other employment, the need of disabled persons for support and retraining in the acquisition of new skills may even be more pressing than that of other terminated employees.

Denying injured workers severance pay does not further the objective of the pay as defined by the attorney general, he said.

“To the contrary, it frustrates it,” said Justice Juriansz.

The retiree argument

The hospital and the attorney general also argued that severance pay is not appropriate in cases where employees will not return to the workforce and whose financial needs will be met in other ways.

They gave the example of a worker retiring on a full pension. Such an employee would probably have the longest service with the employer, and would have made the greatest investment in the employer’s business, and yet a retiree does not receive severance pay.

The hospital and the attorney general said this makes sense because seniority and job-specific skills are of no value to these employees upon retirement and their financial needs will be met in other ways.

Translating this argument to disabled workers, they said employees whose contracts have been frustrated due to illness or injury are not likely to return to the workforce and their financial needs will be met through CPP payments, disability benefits or both.

Workers could return

Justice Juriansz said the argument around why retirees don’t receive severance pay was compelling, but dismissed the idea that workers whose contracts have been frustrated due to illness or injury won’t work again.

“It cannot be said as a matter of logic and common sense that employees whose employment has been frustrated are not likely to work again,” he said.

He said it reflects a stereotypical presumption about the adaptability, industry and commitment to the workforce by people with disabilities severe and enduring enough to frustrate their employment.

“The generalization can only have the effect of perpetuating and even promoting the view that disabled individuals are less capable and less worthy of recognition and value as human beings and as members of Canadian society,” said Justice Juriansz.

The court ruled the section of the Employment Standards Act that prohibited severance pay to such workers was not a “reasonable limit” under s. 15 of the Canadian Charter of Rights and Freedoms. That section states:

“Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.”

The lower court ruled that the portion of Ontario’s legislation restricting severance pay to workers whose contracts had been frustrated due to illness or injury was unconstitutional and of no force and effect, a ruling the Ontario Court of Appeal affirmed.

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