Avoid These Common Mistakes When Terminating Employees

I represent both employers and employees as legal counsel. Let me take a moment to use that experience to provide an insight into the mistakes that employers commonly make when terminating an employee’s employment.

1) Relying on a Void Termination Clause

By far the most common mistake that employers make is also the most costly. It is a mistake that is made long before the employee is dismissed.

Phil White is an employment lawyer practicing in Toronto. He can be reached at pwhite@grosman.com or 416.364.9599

Phil White is a Toronto employment lawyer. He can be reached by email at pwhite@prwlaw.ca or by phone at 416.613.1381 or 1.888.350.9204 (toll-free)

The employer has the employee sign an employment contract that contains a termination clause that will not be enforced by a court. As a result, the employee will be entitled to reasonable notice of dismissal which, in most cases, will result in the employer providing a severance package that is far greater than what the employee would have be entitled if the termination clause was actually enforceable.

The number of employers who provide their employees with employment contracts containing void termination clauses is amazing. I would estimate in Ontario that 30% of the termination clauses in employment contracts are void. This includes employment contracts relied upon by large corporations with thousands of employees. The problem is so widespread that employment lawyers who represent employees have become experts at quickly spotting flawed termination clauses. I do it almost every day.

Employers should have their existing employment contracts reviewed by experienced counsel to ensure that the terms of the contract will actually be enforced by a court. It is not an expensive and the potential savings are massive.

Be aware, however, that if an employment contract contains a void termination clause the employer will not be able to solve the problem by having the employee sign a new employment contract with a properly drafted termination clause. The court is unlikely to enforce the terms of the new employment contract unless the employer has followed the procedure set out by the Ontario Court of Appeal.

2) Losing control of the termination process

Most human resource professionals are aware that an employer may be liable for “moral damages” if the manner in which an employee is dismissed is in bad faith and results in the employee suffering from mental distress. Despite this knowledge, many dismissed employees confront their former employers with legitimate moral damage claims.

Employers often find themselves at risk of a moral damage award because of unchecked animosity between the terminated employee and his or her manager. Simply put, a manager’s personal vendetta can quickly become a liability for the company. The root cause of the problem can be traced to the fact that the human resources department failed to take charge of the termination process and, instead, allowed a manager who lacked the training, professionalism, and objectivity required to conduct a professional termination to taint the termination process.

Human resource professionals should ensure that they have the authority to lead the termination process. It is not enough to focus the termination process on the soon to be dismissed employee. Be aware that the employee’s manager, as well as other employees, may also need to be actively managed during the termination process. Do not let a manager’s personal vendetta escalate to the point where it exposes the company to significant financial liability.

3) Discontinuing employees’ insurance benefits on the date of dismissal

Many employers have a policy of discontinuing dismissed employees’ benefits on the date the employees are dismissed. In particular, long-term disability (“LTD”) insurance is often immediately discontinued.

Employers who follow this policy often fail to realize that the dismissed employees’ entitlements to LTD benefits do not end simply because the benefits have been discontinued. Instead, the employer has made the decision to step into the shoes of the insurer. The dismissed employee’s LTD benefits continue with the employer potentially liable to pay any LTD claim.

The greatest risk an employer assumes when it discontinues an employee’s benefits is that the employee will become permanently disabled during his or her notice period and without having reached a binding settlement with his or her employer. Under a worst case scenario, the employer may find itself liable for hundreds of thousands (and potentially millions) of dollars in insurance payments if the disabled former employee is unable to re-enter the workforce.

Canac Kitchens found out the hard way what can happen to an employer when it dismisses an employee and fails to continue his or her STD and LTD benefits.  A former employee, Frank Brito, was diagnosed with cancer after he had been dismissed from his employment.  Justice Echlin of the Ontario Superior Court found that Mr. Brito had become permanently disabled during his reasonable notice period and therefore was entitled to collect his LTD benefits until he reached the age of 65.  Since Canac Kitchens had cancelled Mr. Brito’s insurance coverage it became liable to pay Mr. Brito’s STD and LTD benefits.  Justice Echlin ordered Canac Kitchens to pay Mr. Brito approximately $200,000.00 in damages for its failure to continue Mr. Brito’s LTD and STD benefits.  This award represented the net present value of his LTD and STD benefits from the date he became disabled until the age of 65. It was also in addition to the wrongful dismissal damages that it was ordered to pay.

The cost to Canac Kitchens could have been considerably higher.  Mr. Brito was 56 years old when he contracted cancer.  Consider what the cost to Canac Kitchens would have been had Mr. Brito been a much younger employee entitled to collect LTD benefits to the age of 65.   

Employers should consider purchasing private insurance for dismissed employees for the duration of their notice period. In addition, new employees can be asked to sign employment contracts that limit the duration of their entitlement to insurance benefits to the statutory notice period set out in the ESA.

4) Failing to accrue dismissed employees’ vacation pay during the statutory notice period

Many employers, governed by the Ontario Employment Standards Act (“ESA”), do not realize that they are required to continue to accrue a dismissed employee’s vacation pay during the employee’s statutory notice period. Sections 60 and 61 of the ESA requires that an employer must maintain a dismissed employee’s terms and conditions of employment throughout the employees’ statutory notice period (which is a maximum of 8 weeks). Therefore, the employer must continue to accrue the dismissed employee’s vacation pay.

Employees who initiate litigation will often raise in their statements of claim the failure of their employer to comply with its minimum obligations pursuant to the ESA. The employees do this to discredit their employers in front of the Court. As a result, there is a practical reason, as well as a legal obligation, to ensure compliance with the ESA.