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Commentary on Sylvester v BC., a case focused on the inter-relationship between severance payments and disability insurance. Introduction Before Sylvester The Sylvester Case Post Sylvester - McNamara and Sills Where are we now?

Introduction


The issue of the respective entitlements to severance and disability insurance was thought, at least by the writer, to have been well resolved well before the 1997 decision of the Supreme Court in Sylvester v BC.

Let it be clear that the writer was counsel to McNamara in the Court of Appeal decision of McNamara v ACIL mentioned below and also that for the reasons that hopefully are clear, is of the view that Sylvester was a poorly reasoned decision.


Before Sylvester

In 1986 the Ontario Court of Appeal, in McKay v Camco 53 OR (2d) 257, set out the manner of dealing with the inter-relationship between severance payments and disability insurance benefits.

McKay had been employed in a mid management position with Camco commencing on March 1, 1979. His salary was agreed at $40,000. In addition he received company provided non contributory benefits, which included short and long term disability benefits. The short term allowed for company paid salary continuance for a total of 26 weeks, 13 at full pay and 13 at 66%.

McKay, with over 100 other Camco employees was given notice of termination on June 6, 1980. Although termination was effective August 1 of the same year, he was not required and did not report to work in that interval.

While playing racquetball on June 22, he suffered a serious eye injury. Three operations followed. He lost his left eye.

Under the disability insurance policy, his medical and hospital bills were paid. He also received a lump sum payment of $40,000. His salary, in the above manner, was continued through to December 22, 1980, which marked the end of the short term disability period.

He found new employment in February of 1981, at a reduced salary level of $30,000. He remained in this position for one year.

The issue before the Court of Appeal was how to deal with the company’s notice obligation and the receipt of company paid short term disability payments which ran from June 22 to December 22, 1980. Justice Keith at trial had determined the notice period was 5.5 months, which was not challenged on appeal.


Justice Blair, speaking for the majority on appeal ( Justice Finlayson dissenting) found that there existed a qualitative distinction between the obligation to give notice and the provision of disability benefits, which resulted in his conclusion that receipt of one did not offset the other.

The appellant’s rights under the contract of employment to disability payments and to proper notice are not only different in kind but also serve different purposes. The right to disability payments is intended to provide income to the appellant when he is unable to work. The purpose of requiring reasonable notice is to give the dismissed employee an opportunity to find other employment.

He accordingly concluded that the two payments could not be set off against each other. 

That did not end the matter, however. The court determined that in view of the differing purposes, the entitlement to each payment was not to be determined in the identical time period.

Effectively, the disability was seen to interrupt the notice period, which was put on stand by until the disability had concluded. The residual notice entitlement then resumed effective December 23, 1980 with credit then being given to the employer for the new income earned in the early months of 1981.

All this made perfect sense - two types of payments serving different intents and not overlapping one another.

Sylvester

Slyvester v BC altered all this and it is submitted, has put the law into disarray.

Slyvester was a BC government employee - he held the position of Director of Private Training Institutions. He was fired on July 23, 1992 due to a reorganization.

Prior to termination on June 1, 1992 he took ill. Under the terms of the STIIP ( Short Term Illness and Injury Plan) he was entitled to receive 7 months salary at 75%. These payments were made for the 7 month period from June 1 to December 31, 1992. He initially had sought and was declined long term disability benefits under the LTDP. ( these were subsequently granted ) The latter, he claimed was due to him for the 1993 year.

Both short term and long term disability plans had been found as a fact at trial, which appears to be a critical finding, were funded entirely by the employer and the plaintiff did not make any direct or indirect contributions to either plan.

By the termination letter of July 23, 1992 he was offered 12.5 months notice commencing August 31, 1992. Sylvester was advised that his income would be topped up by the employer for this time period to full salary.

Under the McKay v Camco formula, Sylvester would have had his full entitlement to disability followed by the commencement of the notice period, less income earned in the usual sense for the notice period.

That was not argued apparently by either party.

At trial before Harvey, J., the notice was found to be slightly wanting and was increased to 15 months. From this award was deducted the short term disability payments made in this same time period, ie 15 months from the date of termination.

At the Court of Appeal, the notice period got a further boost to 20 months. In the intervening time period Sylvester had qualified for long term disability payments. The short term and long term benefits, the court concluded, did not offset the claim. Sylvester was awarded his notice claim of 20 months and maintained recovery of all disability benefits recovered in the same time period.

The Supreme Court in a rather unanimous decision overruled the BC Court of Appeal and deducted all disability benefits from the notice award of 20 months, which itself had not been challenged on appeal.

McKay v. Camco was mentioned, obliquely, by Justice Major in Sylvester. In passing the court noted that disability benefits were not deducted in McKay, which did not, in fairness, give proper credit to the analysis of Justice Blair. The conceptual distinctions as noted above and the determination of the distinct entitlement periods were not noted.

This omission is remarkable, particularly given the attention paid by the court to the fact that “simultaneous payment of disability benefits and damages for wrongful dismissal is inconsistent with the terms of the employment contract”. This indeed had been the conclusion of the Ontario Court of Appeal in McKay v Camco.

The foundation on the issue of double recovery itself is suspect as the court started with the proposition that damages for wrongful dismissal are assessed on the salary which would have been earned during the notice period, even where the employee would have been medically unable to do so.

Apart from the arguments made in Sylvester, and the decision reached by the BC Court of Appeal, that had never been the law.
Without regard to the integrity of the reasoning itself, Sylvester left a large hole through which a Mack truck could be easily navigated.

There could be a class of cases, the court determined, where recovery for wrongful dismissal could be sought without offset for disability benefits where the disability benefits were akin to those from a private insurance plan for which the employee had provided consideration - which was not the case in Sylvester.

Cunningham v Wheeler, a 1994 decision of the Supreme Court of Canada [1994] 1 SCR 359, had set out the test to show indirect consideration to support a loss of income claim without offset for disability payments in tort actions. Evidence of contributions to a disability plan, whether paid directly or by a reduced wage were determined to be sufficient to establish a private contract of disability insurance. Evidence of consideration for disability benefits has been seen in trade offs where the employee has foregone higher wages, or where the employee is taxed for the benefits which have been provided. 

Given that all benefits are taxed to the employee, the exception may well have been expected to become the norm.

Post Sylvester Decisions - McNamara and Sills

McNamara v Alexander Center Industries

Two recent decisions of the Court of Appeal in Ontario have seemingly done just that - made the excepting words of Sylvester the rule.

In McNamara v ACIL, Justice MacPherson found that Major, J. must have had his eye on the Cunningham v Wheeler ratio.

Justice MacPherson also determined that while double recovery should be a concern where the two streams of payments came from the same source, as in Sylvester, the BC government, that issue should be of less significance where the double recovery flows from two different and legitimate sources, where each payor would not be responsible for paying one penny more than its individual obligation.

As a policy matter, Justice MacPherson noted that without the off set, ACIL would be required to pay just what the law demanded of it.

This was emphasized in McNamara where the plaintiff gave direct and uncontradicted evidence on the trade off discussion at the time of hiring.

Sills v City of Belleville

The trial judge found that Ms. Sills contributed to the disability insurance which was seen as part of her wages and part of the trade off process in arriving at salary. The argument for set off of disability insurance for the severance period was again declined.

The court concluded that, absent a provision precluding double recovery, the inference of the double recovery should be inferred, given the presence of indirect consideration.

The reasoning presented by Justice Simmons seems flawless - it is reasonable to assume that an employee would not negotiate and pay for benefit which would allow an employer to avoid responsibility for a wrongful act - surely who could argue otherwise.


Where are we now ?

It does not seem to be a dramatic leap to argue that every employment relationship creates a bargain where the employee provides services and the employer pays for those services by salary and by the provision of benefits. The fact that benefits are taxed in the hands of the employees supports that conclusion. Quite often the disability benefits are paid directly by the employee to allow for tax free disability payments.

The striking conclusion must be that the exception now will likely be the rule. Sylvester, with respect, was a poorly reasoned decision. McKay v Camco was not broken. Sylvester is.

(C) 2002 David Harris L.L.B. Barrister & Solicitor
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