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Chris Gory is the founder of Insurance Portfolio Financial Services Inc., a brokerage launched in 1999 that helps companies build benefits programs for their employees.
Chris Gory is the founder of Insurance Portfolio Financial Services Inc., a brokerage launched in 1999 that helps companies build benefits programs for their employees.

Terminating an employee? Cutting off insurance benefits can come back to haunt you Add to ...

Terminating an employee is always difficult, but when it comes to employee benefits, both employees and employers need to do their due diligence to avoid issues in the future.

Employers typically think about issues such as showing due cause or the length of severance packages, and employee benefits aren’t at the top of the list of considerations. But benefits can often come back to haunt you after employees leave, as they can sue their former employers for big bucks if the proper procedures weren’t followed. Here are a few tips on making sure you’ve covered your bases during the termination process.

Make sure you know how long an employee is covered after they leave

It’s important to factor benefits coverage into the severance package. This is where you outline the employee’s notice period – the length of time after termination that the employee will remain eligible for benefits – which is something many employees, and indeed employers, may not realize.

Employee benefits coverage needs to be extended for the same duration as a termination package – it’s a common misconception that notice periods only need to meet the statutory minimums to satisfy an employer’s obligations, which equals approximately one week of notice for every year of employment. Either you or your employee benefits broker should also notify the insurance company in advance of the termination, and have them approve the continuation of benefits.

If your benefits package includes long-term disability coverage, your insurance provider likely won’t extend those benefits for a terminated employee, so you’ll need to set up separate LTD coverage.

Take common-law notice into account: it’s not always a simple calculation

The minimum legal requirement of one week for every year of employment is often overridden by common-law notice. This supplements statutory minimums, and is determined by a number of factors including employee position, age, and length of service.

Violation of notice periods is often to blame for an employer becoming liable for damages during termination, usually as a result of cancelling an employee’s coverage too soon. Notice periods are also often calculated by taking into account court decisions in similar cases.

Protect yourself by having employees sign a waiver

Having employees sign a waiver as part of the departure process is one of the best ways to avoid any future liabilities for employers, regardless of whether an employee is terminated or has quit.

One of the main purposes of the waiver is to ensure that the employee is aware of their right to convert their employee benefits coverage to an individual policy. Many employees may not realize this, but they have a right to convert to individual life, health and dental coverage before their previous coverage is cut. If the conversion is done within 31 days of leaving the company, no medical underwriting is required.

In Card Estate v. John A. Robertson Mechanical Contractors (1985) Ltd. (1989), 26 CCEL 294, (Ont. H.C.), an employee was terminated without being told that his life insurance was being terminated or that he had 31 days to convert the life, health and dental coverage to an individual policy. The court found the employer was liable to the employee’s estate when he died during the conversion period.

Make sure you accurately describe benefits packages to employees and their dependents

Apart from a thorough waiver, there are other steps that employers can take, particularly during the hiring process, to ensure a smooth termination. One of the most important is accurately describing the employee benefits in the initial benefit package that’s given to new hires.

If discrepancies come to light between the package literature and what the insurance company has listed, employers can find themselves paying for the difference, and this amount often can be more than the cost of the original plan. Employers are required by law to provide a printed or electronic package outlining the benefits program to each employee and, when changes are made to the coverage plan, each employee should be given an updated copy.

Employers have also been held liable for not providing employees with clear instructions about the benefit packages. In a 1999 case, Deraps v Labourer’s Pension Fund of Central and Eastern Canada, Mrs. Deraps signed a waiver giving up all rights to spousal benefits after her husband’s death and she went on to sue her husband’s employer, the labourer’s pension fund, claiming that she wasn’t aware of what she was signing and that no one had explained to her what the waiver contained. The court found that the benefit plan’s administrator had a responsibility to provide “complete and clear information.” Mrs. Deraps was awarded damages equal to the amount of the pension income she would have received had she not signed the waiver.

In a similar case, Feldstein v Northern Development Corp., the British Columbia Supreme Court awarded an employee who suffered from cystic fibrosis a total of $93,336.90 in damages after they claimed that their long-term disability benefits were not accurately explained to them when they were initially hired.

The court said that the method by which the employer described “Proof of Good Health” (a requirement for LTD benefits) was “inaccurate, untrue, and misleading.”

When in doubt, seek legal advice

The best plan should you have to terminate an employee is to consult a labour lawyer. There are myriad circumstances that can result in an employer paying out substantially more than was outlined in a severance package, and consulting an expert in the field will ensure both parties know where they stand.

Chris Gory is the founder of Insurance Portfolio Financial Services, a brokerage launched in 1999 that helps companies build benefits programs for their employees. Chris is passionate about helping entrepreneurs, and works with over 50 startup companies including Wattpad, 500px, and VarageSale. He is an adviser at the Ryerson Digital Media Zone and at the OneEleven startup hub.

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