A recent Supreme Court of Ontario decision highlights a serious problem which can arise with a poorly drafted employment agreement or an ill-considered severance package. The case involved the termination by Canac Kitchens of a long-term employee, Luis Romero Olguin. Olguin was 55 years old and had 22 years service with Canac when he was terminated without cause as part of an overall reduction in headcount.

An employee terminated without cause has two potential entitlements, one in statute and one at common law. The Employment Standards Act requires an employer terminating without cause to provide a stipulated period of notice of termination, or payment in lieu of notice. The employer is also required to continue the employee’s benefits for the statutorily required notice period, even if the employee is given payment in lieu of notice.

Employees terminated without cause have a second potential entitlement. In the absence of an enforceable employment agreement which governs the issue, the common law imports into all employment relationships an obligation on the part of the employer to provide “reasonable notice” of termination or payment in lieu thereof. Typically, the reasonable period of notice at common law exceeds the statutorily mandated notice period. A key distinction between the two entitlements is that the common law entitlement is subject to an obligation on the part of the employee to mitigate, while the statutory entitlement has no mitigation requirement.

In the case at hand, the employer provided only the statutorily required 8 weeks of notice and continued the employee’s group benefits for the statutorily mandated period of 8 weeks. The employer provided no additional severance in recognition of the employee’s potential common law entitlement, hoping that the employee would find alternative employment during the period represented by the statutory payments, thereby fully mitigating any potential common law claim.

In fact, the employee did find new employment, but at a lower salary and without benefits. Shortly after commencing the new employment, the employee became seriously ill, underwent a number of operations and was unable to return to work. The prognosis was that he would never be able to work again. The employee sued Canac for wrongful dismissal.

At trial, the court found Canac’s common law obligation with respect to “reasonable notice” to be 22 months. In determining damages in wrongful dismissal cases, the court considers what the employee would have received by way of compensation had he remained in his employment during the notice period determined by the court, and deducts from that any amounts actually paid by the employer and any amounts earned by way of alternative employment. The consideration of what the employee would have received during a common law notice period includes not only salary, but all forms of compensation, including any benefits to which the employee would have been entitled. In the case before the court, Olguin’s benefits with Canac included disability benefits. Those benefits had not been continued past the statutory 8 week period. The court determined that the employee was entitled to be compensated for the loss of benefits, including the disability benefit, for the reasonable notice period stipulated by the court. Since the employee had become permanently disabled during the common law notice period, he was entitled to damages calculated as if the benefit had been in place. In this case, since the disability was permanent, had the employee actually been in the employ of Canac during the reasonable notice period, he would have been entitled to receive benefits pursuant to the disability policy until his 65th birthday (the normal date of termination of disability benefits under group insurance policies). In the circumstances, the damage award against Canac included the commuted value of the disability payments to which the employee would have otherwise been entitled, but for the termination of the disability benefit plan, until age 65.

Canac‘s liability in this matter arose from an unusual, but foreseeable set of circumstances. Most employers, and many non-specialist lawyers drafting employment agreements or advising on severance arrangements, wouldn’t recognize this exposure or other claims which may arise during a common law period of entitlement when the employer is not protected either by contract or by a properly conceived severance offer.