When an employee is fired and not given sufficient notice, a common point of dispute becomes how to properly calculate the lost value of non-monetary benefits. Wages, by contrast, are a relatively simple affair. If a court orders the employee ought to have received an additional three (3) months’ notice, the parties need only calculate the value of three months’ wages and any resulting interest for the delay in payment.
In terms of benefits, competing arguments have been raised over the years by employers and employees as to how to properly value lost entitlements. These can be roughly placed into three competing valuation theories, consisting of the:
Premiums theory: providing pay-in-lieu of the employer’s exact contribution to premiums for the employee’s lost benefits;
Percentage-in-lieu theory: providing a fixed percentage of base wages in lieu of lost benefits; and
Replacement costs theory: providing evidence of the actual cost of comparable benefits available in the market and ordering payment of the same to the dismissed employee.
In this article, we examine these three theories in turn, giving consideration to the arguments underpinning each and the preference of Ontario courts.
The Premiums theory is the favoured valuation of most employers. It provides that dismissed employees who are awarded additional compensation for unpaid severance ought to receive value for lost benefits in accordance with the premium cost to employers in maintaining benefits during the notice period. To do otherwise can be argued as penalizing an employer by ordering it expend an amount in excess of the actual cost that would have been incurred had proper notice been given.
That said, in recent years, the Premiums theory has seemingly fallen out of favour with Ontario courts. Many judges have noted that requiring employers to simply pay the value of premiums risks undercompensating employees. This stems from the fact that employers can often command lower premiums through a group plan than an employee can obtain in purchasing individual coverage.
Relevant authorities applying the Premiums theory include: Alpert v. Les Carreaux Ramca Ltée, 1992 CanLII 7748 (ONSC) at p. 16; and Orlando v. Essroc Canada Inc.,  O.J. No. 4056 (QL) (Gen. Div.) at para. 25.
The Percentage-in-lieu theory is often favoured by dismissed employees. It represents perhaps the simplest method of quickly quantifying lost benefits by applying a fixed formula. This is traditionally done by calculating the value of lost benefits at a rate of 5 to 15 percent of the dismissed employees’ base wages over the applicable notice period.
As explained in the recent decision of Mikelsteins v. Morrison, 2018 ONSC 6952:
It seems to me from a review of the authorities that a percentage figure…was chosen based upon the allure of a simple formula, selected for the sensible reason to avoid the litigation cost of unraveling a potentially contentious subject-matter without significant benefit. [at para. 23]
The Percentage-in-lieu theory has nevertheless been criticized by some as being arbitrary in its calculation of damages. Accordingly, employer counsel typically argue that to award damages for lost benefits based on a fixed percentage calculation could result in a financial windfall for the dismissed employee, thereby not accurately placing the worker in the position that they would have been absent a wrongful dismissal from employment.
Replacement costs theory
The Replacement costs theory falls somewhat between the prior two theories discussed in this article. It calls for the calculation of lost benefits based upon evidence as to actual replacement cost using then-market rates. As such, either the employee or the employer must obtain this information and ensure it is made part of the evidentiary record.
The Replacement costs theory continues to be regularly applied by Ontario courts, though perhaps somewhat less frequently than the Percentage-in-lieu theory. The reason for this difference may be due to the simple fact that properly advancing the Replacement costs theory involves a fair amount of time and work. One (or both) parties must invest energy in obtaining market quotes and identifying comparable alternatives to employer benefits plans available on an individual basis. That is not always an easy task.
Absent evidence as to actual replacement costs, the alternative valuation theories typically provide a more practical and efficient basis for assessing loss.
Relevant authorities applying the Replacement costs theory include: Ryshpan v. Burns Fry Ltd., 1995 CanLII 7278 (ONSC) at paras. 36-29; and Gutierrez v. Kohler Ltd., 2009 CanLII 593 (ONSC) at paras 17-19.
The above listed theories are not intended to be perfectly representative of every case where the issue of benefits valuation has been disputed. For instance, in Dussault v. Imperial Oil Limited, 2018 ONSC 4345, the Court fixed the value of lost benefits at 8 percent of base wages after the employer led evidence as to its own valuation of benefits as compared to base wages. How Imperial Oil came up with its percentages (such as by reference to its premium costs) is a bit of a mystery. Nonetheless, the decision perhaps applies a hybrid between the Premiums and Percentage-in-lieu theories.
If there is one lesson that can be taken from the cases as a whole (and applicable equally to employers and employees), it is that the issue of benefits should not be left as an afterthought. There will be real pros and cons (with hard dollar consequences) depending on what valuation theory a court accepts. Make sure to plan accordingly in order to have the best chance of successfully applying your preferred valuation theory in practice.
This article was originally published on December 14, 2018 on First Reference Talks.
Vey Willetts LLP is an Ottawa-based employment and labour law boutique that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in the National Capital Region and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or firstname.lastname@example.org