Benefits schmenefits? Not so fast

Exclusive to Canadian HR Reporter from Rudner Law. 

There is a litany of reasons why a termination clause may be found to be unenforceable. One of those reasons, in my opinion, does not get the attention it deserves: benefit continuation, or lack thereof. 

This can sink an otherwise solid termination clause.

In Ramotar v Trader Corporation, the Ontario Small Claims Court found a termination clause which provided as follows to be unenforceable:

"If your employment is terminated without cause, the Company will continue your group insurance benefit coverage for such period as the [Employment Standards Act, 2000] shall require, provided such coverage is available from the insurer.”

The employer made the mistake of making the employee’s benefit continuation conditional on the insurance provider. Continuation of benefits is non-negotiable during the statutory notice period and as the court found, the employee would be entitled to compensation in lieu of benefit continuation if the insurer could not continue their coverage.

The clause was illegal as it had the potential to provide less than the Act’s minimum requirements.

Employment Standards Act

The Act is clear that upon dismissal, employees’ compensation, and the terms thereof, are not to change during the statutory notice period. This means that an employer cannot make any changes to a dismissed employee’s compensation during the statutory notice period; in particular, they cannot discontinue an employee’s benefit participation if they were entitled to participate in the employer’s plans at the time of dismissal.

The Act further provides that “[an employer] shall continue to make whatever benefit plan contributions would be required to be made in order to maintain the employee’s benefits under the plan until the end of the notice period.”

As such, with respect to dismissed employees, employers have an obligation to not make any changes to their terms and conditions of employment, and to continue paying the premiums to the insurance plan providers. Termination provisions that make benefit continuation conditional on the insurer are therefore in breach of the Act, because they allow the employer to discontinue paying premiums when the Act is clear that this is an obligation upon dismissal.

Continue benefits or else…

Making sure that your termination clause’s wording regarding benefits does not breach the Act is just one concern. A closer reading of the Act’s benefit provision quoted above tells us that the employer’s obligation is to continue making payments to the insurer, not to provide insurance coverage. Employers must keep making these payments regardless of the insurers’ coverage.

Failure to make these payments has costly consequences. For one, the Act provides that employees are entitled to the amount of unpaid premiums, treating this amount as unpaid wages. Second, if an employer fails to make the required payments and an employee suffers damages or injuries that would have been covered, the employee can make a claim against the employer for the benefits they would otherwise have been entitled to, which could be quite valuable.

At common law, employers also have the obligation to make these insurance premium payments. The difference is that common law notice periods are much longer than statutory notice periods. While statutory notice periods top out at 8 weeks, common law notice periods can be as long as 24 months.

Thus, during long notice periods, employers are at risk of substantial claims if they stop making the premium payments to their plan providers, even if benefits cannot be continued by the insurer. For example, most insurers will not continue things like disability coverage beyond the statutory period, but that does not let an employer off the hook.

Common law obligations

There have been cases where employers have stopped paying the premiums, only for employees to suffer catastrophic injuries, leading to claims for long-term disability damages and life insurance payouts. Fortunately, unlike with statutory obligations, employers can contract out of their common law obligations.

This significantly reduces their risk exposure, particularly with respect to benefit continuation.

Not understanding your obligations with respect to benefit plans can be very costly. Luckily, HR counsel can assist in drafting enforceable termination provisions that provide appropriately for benefit continuation and limit potential liability. We can also advise employers as to how to navigate the benefits minefield prudently.

David Gelles is an associate lawyer at Rudner Law in Toronto. He can be reached at (416) 864-8500 or [email protected].