Disability Payments

About once a year I get the following type of case. An employee becomes disabled and begins receiving long-term disability benefits. After going on disability the employee is fired and the employer attempts to reduce any pay in lieu of notice it intends to pay the employee by claiming it as a set-off as against any disability benefits received. To properly research this situation, one must review the disability policy. But let's look at a couple of cases.

In the Ontario Court of Appeal decision (2001) of Sills v. Children's Aid Society of the City of Belleville et. al. an employee of the Children's Aid Society, City of Belleville was fired without cause. She was offered 14. 5 months of working notice. In other words, she was offered the opportunity to work during the notice period which she accepted. Two months into this working notice period she became ill and applied for short and then long-term disability benefits. The facts are involved, but suffice to say that the principle of this case revolved around the deductibility of disability benefits as against pay in lieu of notice. The employer attempted to deduct the "salary continuance" during the 14.5-month notice period from the disability benefits the employee was receiving.

The Court upheld the trial Court's view that an employer is not relieved of its obligation to pay damages for wrongful dismissal (without-cause dismissal upon insufficient notice). The Court stated that because disability payments are contractual in nature, the question of their deductibility turns on the terms of the employment contract and the intention of the parties. In this case, the Court stated that it was reasonable to assume that an employee would not pay for a benefit (i.e. make contributions to a benefits policy during employment) that would ultimately enable the employer to avoid responsibility for a "wrongful" act (not providing reasonable notice upon termination of employment without just cause).

Now let's look at the same situation from the disability insurer's point of view. In Re Canada Life Assurance Company and Donohue (Superior Court of Justice, 1999), where the insurance company sued the employee. In this case, Donohue went on disability and then two days later was fired without cause. He received a lump sum of pay in lieu of notice in the amount of 24 months of salary. The insurance company found out about this and sought the Court's opinion regarding the following clauses in the insurance policy: "If the Employee is entitled to receive any income from any other source listed below.... and the amount of an Employee's monthly gross income from all sources listed below exceeds the Integration Level (defined as 85 per cent of his indexed net pre-disability monthly earnings), we will reduce our Benefit to the extent necessary so that his total monthly amount of gross income from these sources is equal to the Integration Level". One of the listed sources was "any continuation of salary from his Employer" and "income from any employment, other than as described in the other sections". The employer sought a declaration from the Court that the integration provision of the group policy applied to the lump sum severance package. The insurer in this case, attempted to use the severance money to reduce its obligation to pay disability benefits.

The Court found that the severance pay did not constitute "continuation of salary" or "income from any other employment". It was not meant to compensate the employee for having performed work. There are however other cases which state the reverse.

If you are claiming severance pay and disability benefits and are having difficulty doing both, call me to discuss your case. This type of situation requires careful scrutiny of the facts and relevant insurance policies.

The above is not legal advice.

Leslie J Smith is a partner with the law firm of Haxell & Smith in Oakville, Ontario. She can be reached at 905-845-0767.