October 18, 2007 By: Janice B. Payne
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In October 2000, Mary Egan ("Egan") left her senior marketing position at Bell Canada ("Bell"), where she had worked for almost twenty years, to commence employment with Alcatel as Director of Product Marketing. She had been encouraged to apply for a marketing position at Alcatel by two former Bell employees, who worked in similar positions at Alcatel. These two employees shared an $8,000 bonus paid by Alcatel for recruiting Egan through a program called "The Talent Network". This was a common practice in high tech during the boom times in the late 1990s and early 2000s. Throughout her employment with Alcatel, Egan remained in a director level position.

On July 3, 2002, Alcatel terminated Egan, less then twenty-one months after hiring her. She did not receive any prior notice, and was dismissed without cause. Her dismissal was part of a mass termination by Alcatel, due to the general downturn in the high-tech industry. Her termination letter offered her a severance package of 16 weeks salary. The letter also advised her that her health care, insurance and short-term and long-term disability benefits ("STD" and "LTD") would continue until the expiry date of the statutory notice period. She was asked to sign a release, which she declined to do.

Three months later, she was diagnosed with major depression and told by her doctors to stop her job search.

The Trial Judge's Decision

Egan sued Alcatel for wrongful dismissal. The trial judge decided that the fact that Alcatel and the two employees who were friends with Egan had induced her to leave her job at Bell was a factor that should be considered in the determination of the reasonable notice period. As well, Egan could have reasonably expected that if she took the job at Alcatel she would enjoy a long relationship with the defendant, absent any cause for her dismissal. With these factors in mind, the trial judge determined that a reasonable notice period would have been nine months and damages were calculated on that basis.

Egan's Disability

Egan also claimed damages for lost disability insurance benefits.

The trial judge concluded that Egan was totally disabled on October 1, 2002 and remained so for a period of one year.

He found that, had Egan been given the appropriate nine months of working notice, the disability coverage would have still been in effect when she became disabled on October 1, 2002, and would have been available to her until October 1, 2003, when she was ready to return to work.

The trial judge concluded that because she was awarded nine months of lost salary and benefits, it would not be equitable for Egan to receive both disability benefits and damages for wrongful dismissal. This would amount to a double recovery, and put her in a better position then an employee who was unjustly dismissed but did not become disabled during the notice period. He awarded Egan her full salary for the nine month notice period, six months of which she would not have been able to work. This, he said, left the plaintiff "whole" in regards to her dismissal in July 2002. The trial judge did not assess any additional damages for Egan's claims for disability benefits. The total damages awarded to Egan at trial were $83,967.45, plus her costs from the action.

The Court of Appeal decision

Alcatel appealed the trial judge's decision to fix the notice period at nine months, the damage award, as well as the costs of the action. Egan cross-appealed the dismissal of her claim for lost disability benefits. In a judgment written by Justice Labrosse the Ontario Court of Appeal dismissed Alcatel's appeal and allowed Egan's cross-appeal.

The first part of the decision is an analysis of whether Egan was induced by Alcatel to leave her secure job at Bell. The Court noted that in Wallace v. United Grain Growers1, Justice Iacobucci commented that Canadian courts have added several factors to the original list from Bardal v. Globe and Mail2. One such factor is whether the dismissed employee has been induced to leave previous secure employment.3 In Justice Iacobucci's opinion, such inducements are properly included among the considerations which tend to lengthen the amount of notice required. The effect of the inducement on the notice period is left to the trial judge's discretion.4

The Court found that the fact that it was two former colleagues and friends of Egan's who were to receive a substantial bonus if she was hired allowed the trial judge to conclude that this should lengthen the notice period. The trial judge also properly found that the statements made by Alcatel fell within the concept of inducement as Alcatel senior management had told Egan that the company was entering into new global markets and a large company like Alcatel offered her job security. As well, she was offered a large increase in salary, a signing bonus and stock options. The Court concluded that the trial judge had not made an error with respect to the finding that Egan had been induced to leave her job at Bell to take the position with Alcatel.

The Cross-Appeal

The Court of Appeal also agreed with the trial judge that Alcatel wrongfully discontinued Egan's disability benefits prior to the onset of her disability on October 1, 2003, as the period of disability originated within the notice period awarded by the trial judge. The Court agreed that the disability benefits were meant to be a substitute for salary, and that awarding Egan her full salary and disability benefits for the nine-month notice period would amount to a double recovery. However, Justice Labrosse stated that the trial judge erred in simply awarding Egan her full salary for the notice period and nothing more for three reasons:

  1. The award gave Egan full salary for the last six months of the notice period, during
    which time she was disabled and would not have been able to work;
  2. The award gave her nothing from April 1, 2003 to October 1, 2003 (after the end of
    the nine month notice period), even though her disability continued;
  3. The award did not leave Egan "whole" throughout the entire reasonable notice period as she is overpaid salary and underpaid disability benefits.

The Court then reviewed the timeline of events to determine the total amount of damages that Egan was entitled to:

July 3, 2002– Oct. 1, 2002: Egan should have been awarded her full salary as she would have been working at Alcatel during this 13-week working notice period immediately after her dismissal.

October 1, 2002 – Jan. 28, 2002: The 17-week period where Egan would have been in receipt of non-taxable STD benefits. The Court of Appeal awarded Egan the value of the STD benefits plus a gross-up for tax.

January 28, 2003 – Oct. 1, 2003: These are the 8 months when Egan was entitled to LTD benefits. This amount was also increased by a gross-up for tax.

The total award of $146,835.98 was significantly higher than the award made by the trial judge.

The Significance of the Court of Appeal's decision

The Egan case is significant for its handling of the entitlements of an employee who becomes disabled during the common law notice period. Consistent with the principle that dismissed employees are to be kept whole throughout the entire reasonable notice period, the employee will receive the value of disability coverage while ill, grossed up for tax if applicable. If the period of disability continues after the end of the notice period, the employee will be entitled to the value of ongoing benefits.

While the decision accurately mirrors employee entitlements had working notice been given, it arguably discriminates between the termination entitlements of healthy as opposed to disabled employees. Some would argue that Egan should have received the full value of her nine months notice period plus her ongoing lost disability coverage.

Regardless, the decision underscores the importance of coming to fair and reasonable binding arrangements with employees at the time of termination or risk the potentially higher liability for loss of disability benefits or life insurance coverage.


1 (1997), 152 D.L.R. (4th) 1 (S.C.C.)
2 (1960), 24 D.L.R. (2d) 140
3 Bardal, supra at para. 83

4 Ibid. at para. 85.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Employment Law