Employees dismissed without cause or reasonable working notice are entitled to money damages equal to their salary during the notice period. Where the employee is disabled at the time of termination, should any disability benefits to which the employee is entitled during the notice period be deducted from damages? Until recently, appeal courts in Canada had been divided on this question. While courts in New Brunswick have held that disability payments must be deducted, the view in Ontario and more recently, British Columbia, was that the employee was entitled to both disability benefits and wrongful dismissal damages.
ONTARIO COURT OF APPEAL: DISABILITY BENEFITS NOT DEDUCTIBLE
In McKay v. Camco Inc. (January 13, 1986) the Ontario Court of Appeal had reasoned that the benefits and damages arose from two separate and independent rights under the employment contract: the first from the explicit terms of the contract providing for benefits in the event of disability, the second from the implied term that an employee will be given reasonable notice where dismissal is without cause. Further, the Court added, these rights had different purposes:
If disability payments were deductible from damages for the wrongful dismissal, the right of the [employee] to reasonable notice would be completely frustrated because he could not have exercised it to search for employment while he was disabled.”
B.C. COURT OF APPEAL: TWO CONTRACTS, TWO SETS OF OBLIGATIONS
Sylvester v. British Columbia
, decided by the B.C. Court of Appeal on June 2, 1995, concerned a managerial employee dismissed due to restructuring after 19 years of service. Shortly before his dismissal, he had fallen ill. The employer offered him severance of 12.5 months’ salary, with any disability benefits to be deducted. The employee sued, and the judge increased his notice to 15 months, with benefits still to be deducted.
The Court of Appeal increased the notice period to 20 months, and ordered that the employee’s damages should not be reduced by any disability payments he had received. The Court held that the employee was entitled to both forms of compensation as there were, in effect, two contracts to be honoured: the basic employment contract, with its implied term of reasonable notice, and the disability plan. Both these contracts formed part of the “total employment package”.
It was true, the Court noted, that employees who are able to work do not receive disability benefits, and those on disability are not paid their wages or salary. Under the usual circumstances, therefore, either the employment contract or the disability plan control the parties’ obligations, but not both at the same time. However, this is not the case once a decision to terminate the employee has been made:
SUPREME COURT OF CANADA: NO INTENTION TO PAY EMPLOYEE TWICE
The employer in Sylvester appealed on the sole issue of deductibility and was vindicated in a unanimous decision, issued on May 29, 1997 by the Supreme Court of Canada. The Court held that, as this was a contractual matter, the question of deductibility was to be resolved by examining the terms of the employment contract and the intention of the parties to the contract.
In contrast to the view of the Appeal Court, the Supreme Court held that the benefit plans were not contracts distinct from the employment contract, but rather integral components of it. An examination of the terms of the employment contract revealed that it did not provide for the employee to receive both forms of compensation, nor could the Court imply an intention to that effect.
The Court based its conclusion on the facts that the benefits plan was designed to provide a substitute for the employee’s salary, and that those benefits were to be reduced by income from other sources. Further, the Court held, simultaneous payment of disability benefits and notice damages was inconsistent with the terms of the employment contract, as the two forms of entitlement were based on opposite assumptions:
In Our View
This decision has been seen by observers as a clear win for employers, who will be spared the burden of compensating terminated disabled employees twice. It has also been assailed as unfair by counsel representing employees, who claim it ignores the distinct purposes of notice and disability payments, as outlined by the Court in McKay.
As noted in the Supreme Court’s reasons, the decision applies only to cases where the cost of benefits is fully paid by the employer, and leaves in question the outcome where the employee has contributed to the disability benefits plan.
For more information on this subject, please contact Colleen Dunlop at (613) 563-7660, Extension 222.