This chapter reviews the issue of the interplay between a severance payment and a concurrent payment of disability benefits.

This is an important issue. The questions to be answered are:

1. Should a disability income be offset from a severance or common law claim for notice; and
2. If not, is there a subrogated claim which may be made by the insurer against the employee insured for the disability sums paid.

The law on the first question is not straightforward. The analysis below will trace the development of the law before and after the leading case of Sylvester. The present status of the law on this subject has followed Sylvester, despite an appellate decision from Ontario which is at odds with it. Knowledge of the history and present debate is necessary to understand and plan for the contrary argument.

Do Disability Benefits Offset Severance Claim

The first issue has been the subject of debate following the release of the Supreme Court of Canada decision in Sylvester. ¹

In 1986, the Ontario Court of Appeal in McKay v. Camco ² determined the manner in which a wrongful dismissal claim should be impacted by a medical disability. These are the rules which were then developed.

1. The purpose of the employer’s obligation to give notice is to allow the employee a chance to find other employment.
2. An employee who is disabled on termination or who becomes disabled during the period of working notice cannot look for alternative employment.
3. Therefore, for example, where a person is normally entitled to 12 months’ notice and is medically unable to seek employment in months 2, 3 and 4, then the notice claim should be suspended for those months and then revived for a further 3 months at month 13, 14 and 15.
4. The claim for disability insurance payments would be allowed and benefits payable for months 2, 3 and 4.

This, of course, made perfect sense and was the common law for many years of all Canadian common law jurisdictions. This decision of the Ontario Court of Appeal was dramatically altered in 1997 by the Supreme Court of Canada decision in Sylvester. ³

The Court in this case decided that an employee who was terminated and could not work for medical reasons, was nonetheless entitled to damages representing the salary he would have earned in the notice period. The fact that he could not work was irrelevant. This was clearly new law and unnecessarily changed McKay.

Because of this reasoning, common law courts were also then required to define for the first time the interplay between a claim for severance and concurrent disability benefits.

A more recent decision of the Ontario Court of Appeal ⁴ restores the pre-Sylvester principles, ⁵ a curious result as clearly the Court of Appeal was bound to follow Sylvester by stare decisis.

In this case, the Ontario Court of Appeal mapped out what the plaintiff would have received in the notice period, such being initially her full salary and then her short and long term disability benefits in the period which followed. ^{6  7}

The court did not follow Sylvester by allowing for salary irrespective of the medical disability. In that sense, it follows McKay and departs from Sylvester. ⁸

Had Sylvester been followed, the court should have awarded full salary for the notice period and then dealt with the issue of whether the additional award of disability benefits should or should not reduce the severance award.

In Sylvester, the plaintiff recovered full salary for the notice period, on which he was medically unable to work and then the court deducted the disability payments which were paid to him for this time period.

In Sylvester it was the employer that paid the disability benefits, not an insurer. The Supreme Court, however, left the issue open as to whether future cases may allow for both wrongful dismissal damages and disability sums to be received concurrently and without offset.

An Ontario case ⁹ which followed allowed both severance and disability without such an offset. ¹⁰ McNamara proved consideration was given for the benefits, which had not been proven in Sylvester. ¹¹

The decision of C. Aitken J. followed in December of 2003. ¹² The plaintiff had also sued successfully for severance and LTD benefits. She also sued and recovered short term disability benefits.

It is debatable as to whether this case would be followed today, given Egan. ¹³ While Egan may be logically compelling, and Sylvester of debatable provenance, the latter is a Supreme Court of Canada decision which does afford it considerable deference.

In March 2011, however, an Ontario decision ¹⁴ however applied the law as it was prior to Egan and awarded the plaintiff severance from which there was no offset for long term disability payments as the plaintiff paid the premiums for this coverage directly. Accordingly, double recovery was allowed. ¹⁵

A similar conclusion was made by the Ontario Court of Appeal ¹⁶ in a September 2004 decision, which was pre-Egan, in awarding both severance and disability without offset. The court concluded that the disability plan contemplated employees would have separate entitlements to both severance pay and disability benefits.

It is to be noted that medical and health benefits are a taxable benefit and included in every T4 issued to that effect. There should be no issue in showing consideration. McNamara had direct evidence which was credible as to why the medical and health benefits were so important to him, namely, that his wife was ill at the time he was considering the offer of new employment and that he was willing to take a lower salary because of the importance of the benefits to his family. This evidence likely would not typically be required, given the T-4 issue, which argument was not made in McNamara. Where the evidence shows that the employee paid for the disability premiums himself, as is often the case to make the disability sum non- taxable income, the consideration is apparent.

Where the employer is the direct provider of the disability benefit, there is no notional distinction made between the disability sum received and the severance. As there is but one source of payment, there is no double recovery. This was the fact pattern in Sylvester itself and repeated recently. ¹⁷

Sylvester appears to remain the status quo of the law. Presuming that there is a third party insurer and the disability is not paid directly by the same employer, and that the employee "paid" directly or indirectly for the coverage. there will be no offset. This principle was repeated in the 2015 Ontario decision of Ciszkowski v Canac.

The question of the subrogated claim of the insurer against the employee-insured for the recovery of disability sums in the severance period is one to be assessed to avoid any unexpected surprises. Often the issue is one determined by policy wording and may not lead to a predictable outcome. A vivid appreciation of the risk may allow for an alternative strategy to avoid duplicate payments of severance and disability benefits where the context allows.

There remains the issue of the right of the insurer to claim back the disability benefits paid to the employee, as reviewed below.