The recent decision of the British Columbia Court of Appeal in Feldstein v. 364 Northern Development Corporation (PDF) is a stark reminder that employers who provide inaccurate or misleading information to prospective employees during the hiring process can be held liable for negligent misrepresentation.

The Facts

Mr. Feldstein applied for a software engineer position with 364 Northern Development Corporation ("364"). Before accepting the position, Mr. Feldstein asked 364's Chief Information Officer ("CIO") about the eligibility requirements for 364's long-term disability ("LTD") plan. This was very important to Mr. Feldstein as he suffered from cystic fibrosis. He thought he would require substantial LTD benefits at some point in the future.

The CIO provided Mr. Feldstein with a summary brochure of 364's LTD benefits. It contained a "proof of good health" clause. When asked what this clause meant, the CIO explained that Mr. Feldstein would qualify for LTD benefits after working for 364 for three months. Based on this information, Mr. Feldstein accepted the position and signed an employment contract.

The employment contract contained an "entire agreement" clause. It said that the contract superseded all prior communications, understandings and agreements between the parties. The contract did not contain any details of the benefits plan.

Shortly after accepting the position, Mr. Feldstein's health deteriorated significantly. He applied for LTD benefits expecting to receive full coverage of up to $5000 per month. Instead, he was only eligible for $1000 per month, which after applicable deductions, amounted to less than $36.56 per month. As it turned out, a complete medical questionnaire was required to establish "proof of good health". Because Mr. Feldstein did not complete the medical questionnaire, he was not entitled to full LTD benefits. Mr. Feldstein sued 364 for negligent misrepresentation.

The Decision

The trial judge found that 364 made negligent misrepresentations regarding eligibility under its LTD plan. The test for negligent misrepresentation requires that the following elements be met:

  1. Is there a duty of care based on a "special relationship" between the parties?
  2. Is the representation in question inaccurate, untrue, or misleading?
  3. Did the person making the representation act negligently in doing so?
  4. Did the person receiving the representation reasonably rely on it?
  5. Did the latter person incur damages as a result of that reliance?

Duty of Care

364 conceded that it owed Mr. Feldstein a duty of care as an employer making representations to a prospective employee.

Inaccurate, Untrue, or Misleading Representation

The court concluded that the CIO's explanation of "proof of good health" was clearly inaccurate. The explanation given would mislead a reasonable person into believing that full LTD benefits would be available after three months of continuous work at 364, without the need to complete a medical questionnaire.

Negligent in Making the Representation

The court found that 364 was negligent in making the representations about its LTD benefits. The CIO took no steps to verify the accuracy of the information he provided. The employer also failed to provide Mr. Feldstein with the medical questionnaire required by the insurer.

Reasonable Reliance on the Representation

The court concluded that it was reasonable for Mr. Feldstein to rely on the information the CIO provided.

Reliance Resulted in Damages

Finally, the court concluded that in light of Mr. Feldstein's health concerns, he would not have accepted an employment offer that did not provide adequate LTD coverage and acceptable eligibility requirements.

Entire Agreement Clause

364 argued that the entire agreement clause in the employment contract meant that Feldstein could not sue for negligent misrepresentation. The court rejected this argument. The clause did not specifically exclude liability for negligence. Further, the CIO's statement relating to the meaning of "proof of good health" did not become an express term of the employment contract. It was a matter outside of the contract. Therefore, the court concluded that the clause could not exclude liability for the pre-contractual misrepresentation.

Damages Award

The trial judge awarded Mr. Feldstein $83,336.80 as compensation for lost LTD benefits and $10,000 for aggravated damages.

The Appeal

364 appealed the trial judge's decision. The British Columbia Court of Appeal concluded that 364 failed to establish that the trial judge erred in applying the test for negligent misrepresentation. As such, the Court upheld the trial judge's award for damages for loss of benefits.

However, the aggravated damages award was found to be inappropriate. Such an award requires that the employer's conduct be high-handed. While the information provided by 364 was misleading, the Court found no evidence that 364 acted in a deliberately deceitful or high-handed manner. As such, the Court overturned the $10,000 award for aggravated damages.

Lessons for Employers

This decision highlights the importance of ensuring that accurate information is provided to prospective employees during the hiring process. Those responsible for recruitment must exercise discretion to determine when someone else in the company (or even a third party) may be best suited to answer a prospective employee's questions. At the very least, when in doubt, information should always be verified before being shared with a candidate. Taking such precautions can save an employer from unintended and costly consequences.