One of the biggest financial risks employers face is terminating an employee who is on the verge of developing a disability

Most companies fail to grasp this hidden landmine. If you are an employer thinking about doing so, think again. You may end up stepping into the shoes of the long-term disability (LTD) insurance company and footing the entire bill.

Most insurers only offer LTD coverage for claims that arise before an employee’s final day of work or during the statutory notice period, which usually ranges from one to eight weeks, depending on the province or territory.

From a risk standpoint, this is understandable. Employees facing a sudden loss of income may be more inclined to seek benefits from their insurers by making false claims. This gap leaves employers holding the bag for disabilities that arise after the statutory notice period but during the much longer common law notice period.

Why? Because, as we have said many times, barring clear contractual wording to the contrary, employees are entitled to receive the same compensation and benefits they would have received had they worked throughout the notice period. When LTD benefits are cancelled after mere weeks, there is significant financial exposure for employers over the ensuing notice period, which can be up to 30 months.

There are two court rulings on this point — one from Ontario and the other from Saskatchewan. In Frank Brito v. Canac Kitchens, the employer took a calculated risk on terminating a cancer survivor, offering Brito only eight weeks’ notice, banking on him quickly securing employment and staying healthy.

While Brito found another job, it did not have LTD coverage. When his cancer returned 16 months later, he sued his former employer. The Ontario court awarded him full severance up to the point of his illness and more than $200,000 in short- and long-term disability benefits up to age 65, plus an additional $15,000 in punitive damages.

A substantially larger amount was awarded in Chadwick Pasap v. Saskatchewan Indian Gaming Authority and Bear Claw Casino. Pasap worked as a facilities manager for five years until his wrongful dismissal. Four months later, he suffered a serious heart attack. The court awarded him eight months of severance. Because Pasap would have qualified for LTD benefits had they been continued during that period, the court ordered the employer to pay more than $1 million (pre-discount), representing a whopping 26 years of LTD coverage up to age 65, when the policy would have ended.

Many observers have since questioned why the employer was ordered to pay out the entire LTD period when a disability insurer would not suffer the same fate. When an employee successfully sues the LTD insurer, the remedy at trial has always been payment of past benefits and reinstatement back onto the insurance policy, not full payment of the policy.

This not only avoids a windfall to the employee — especially if the employee dies, gets better or receives income that would be offset against benefits — but provides protection to the insurer under the ongoing policy terms, such as follow-up interviews or subjecting the employee to medical examinations.

Indeed, at least five cases across the country against insurers (not employers and not in the wrongful dismissal arena) have not supported a one-time payment of the entire value of the LTD policy. So this albatross of a remedy is unique to employers.

The Pasap case went to the Court of Appeal for Saskatchewan. Many had hoped the court would clarify the propriety of paying out the entire policy in the wrongful dismissal context, but it ultimately dismissed the appeal by a two-to-one majority.

In the 230-paragraph decision released earlier this year, much ink was spilled on a technical argument around whether Pasap was totally disabled, but none on whether payment of the entire policy to age 65 was appropriate. It appears the argument was simply not made.

Brito and Pasap are still the leading authorities for LTD damages after a wrongful dismissal. So how do employers limit their exposure?

1. Ensure your employment contracts properly limit entitlements on termination to the employment standards minimums and that your LTD insurer will continue benefits during the statutory notice period, if required in your province or territory.
2. Provide working notice for the appropriate common law period, during which time all group benefits are continued.
3. Obtain a full and final release as part of any settlement that specifically includes disability benefits.

Courts may not see employers as insurance companies, but if an employee falls ill during the notice period after their disability benefits have been cut off, they will treat them as one — only without the same protections available to insurers.