Are Disability Benefits Deducted From Wrongful Dismissal Damages?

Update by Erin Brandt, Cofounder

In the unusual situation where an employee is dismissed while on medical leave, an important question arises: can the employee claim and keep both severance pay and disability benefits? In Sylvester v. British Columbia, 1997 CanLII 353 (SCC), [1997] 2 SCR 315, the Supreme Court of Canada said no; disability benefits received during the notice period from an employer-paid plan should be deducted from the severance pay the employer owes.

Background

Mr. Sylvester was employed by the Province of British Columbia. In 1992 he became ill and began receiving short‑term disability benefits. He made no contributions to the employer‑funded disability plans.

While receiving disability benefits, Mr. Sylvester’s employment was terminated due to a workplace reorganization. The employer offered him 12.5 months’ notice, less any benefits received under the employer’s disability plans.

Mr. Sylvester brought a wrongful dismissal claim and sought 24 months severance, in addition to the benefits he received under the employer’s disability plans.

The Decision

On appeal, the Supreme Court of Canada found that Mr. Sylvester’s disability benefits must be deducted from the wrongful dismissal damages he was awarded in a lower court decision.

The Court reaffirmed that damages for wrongful dismissal are intended to compensate an employee for the salary they would have earned during the notice period. This assessment is based on the assumption that the employee would have been working during that time—even if, in reality, they were unable to do so.

The Court emphasized that disability benefits are contractual, and whether they are deductible depends on the terms of the employment contract and the intention of the parties.

In this case, the disability plans were part of the employment contract. The disability benefits were intended to replace income while the employee was unable to work. Wrongful dismissal damages assume the employee would have worked, while disability benefits are only payable when the employee cannot work—making simultaneous recovery illogical.

As the Court put it, it “makes no sense” to compensate an employee as if they had worked while also paying benefits based on their inability to work.

Finally, the Court reasoned that employees who are dismissed while on disability and those dismissed while working should be treated equally with respect to their severance entitlements.

Key Take Away for Employees

A wrongfully dismissed employee is entitled to claim severance pay based on what they would have earned had they worked through the reasonable notice period, regardless of whether they were able to work during the notice period.

An employee cannot keep both severance pay and disability benefits received under an employer-paid disability plan. However, the outcome may differ where the disability plan is paid for by the employee.

Key Take Away for Employers

Although this case didn’t deal with discrimination under the BC Human Rights Code, dismissing an employee who is on medical leave carries significant legal risk with respect to discrimination on the basis of disability. However, where an employee’s dismissal is wholly non-discriminatory, having an employer-paid disability plan may reduce severance exposure where an employee on benefits is dismissed. The Court was clear that it did not want to deter employers from establishing disability plans.