What should you include in the package and how do you minimize risks and liabilities?
By Stuart Rudner
When it comes to dismissals and “packages,” people tend to focus on the length of the package. Employees are upset that they only got eight months when their colleague got 10. And employers, for the most part, focus on how many weeks or months they have to pay to avoid a lawsuit. However, it's important to consider what is being included in the package.
By default, individuals being provided with pay in lieu of notice of termination are entitled to all compensation they would have received had they continued to work during the notice period. In almost all cases, it's not sufficient to simply continue the base salary. Unless an enforceable contract or policy provides otherwise, commissions, bonuses and all forms of benefits individuals received while they were employed must continue. Benefits include things such as a car allowance, medical and dental coverage, life insurance and disability coverage Failure to continue or provide a form of compensation an individual should be entitled to exposes the employer to potential liability, and the amounts can be significant.
There are two contexts in which this issue typically arises. First, bonuses and commissions are often the source of dispute. Often, employers take the position they will not be paid if the individual is no longer actively employed. However, unless there is a contractual provision in place that will support such an interpretation, an employee is typically entitled to all forms of compensation. If she receives a bonus every year, then iteffectively becomes part of her compensation and has to be accounted for in the dismissal package. Similarly, any accrued commissions must be paid, and the package should, unless the parties have agreed otherwise, account for commissions that would have been earned during the notice period.
The second context in which this arises is in relation to certain forms of health benefits. Insurers typically advise they will not continue life insurance and/or disability coverage for dismissed employees. Employers typically pass this message on to the employee, effectively indicating these benefits cannot continue because it's beyond their control. However, just because the insurance company will not provide coverage, that does not mean the employer is relieved of its legal obligation. In recent years, there have been cases in which disability coverage was cut off during the notice period, and the individual became disabled. In those cases, the courts found the employer was liable for having failed to continue employment-related benefits during the notice period. Their liability, effectively, was to pay the full amount of benefits the individual would have received had coverage been in place. Not surprisingly, this can become a substantial liability.
When I advise employers, I make sure they are aware of this risk and they take steps to address it. Ideally, I encourage our clients to have all employees sign employment agreements which address a number of issues. One of them will be the fact that, in the event of dismissal without cause, certain benefits will not continue beyond the statutory notice period. This would include disability coverage. If this is done effectively, then there should be no issue when it comes to termination. However, if that was not done prior to termination, then the employer needs to ensure any potential liability is eliminated. One way to do this is to enter into a termination agreement whereby the employee agrees t certain benefits will not continue beyond the specified date, and releases the employer from any potential liability as a result.
If the parties cannot reach an agreement, I encourage our clients to consider obtaining alternative coverage for the individual throughout the notice period. There is at least one insurance company in Canada that will provide what they call “transitional coverage” for this purpose.
If an employer does not do either of the above, they risk a situation where, for example, a dismissed employee becomes disabled during the notice period but after the insurer has terminated coverage. If that were to occur, the employer would be liable for any benefits the employee would have received. To appreciate the potential significance of this, imagine a 30-year-old employee that becomes permanently disabled. In such a situation, the employer could be on the hook for 35 years of disability benefits.
Dismissals cause consternation for a number of reasons. Perhaps primarily, a concern that relates to the morale of the remaining employees, and their ability to get the job done. In addition, of course, it's almost always unpleasant to have to go through the termination process, and there is always a risk of a lawsuit and potential liability. Employers should be careful about proceeding in “the way that we have always done it,” and ensure they take all reasonable steps to minimize potential liability. As set out above, this includes some defensive manoeuvres at the time of hiring or during the course of the relationship, as well as some more proactive steps that can be taken at the time of termination and thereadter.
Stuart Rudner is a partner with Miller Thomson LLP in Ontario, specializing in employment law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at (905) 415-6767 or firstname.lastname@example.org. You can also follow him on Twitter @CanadianHRLaw, join his Canadian Employment Law Group on LinkedIn, and connect with him on Google+.