Employees on long-term disability often wonder whether they can be terminated and whether they are still entitled to severance pay. In Ontario, the answer depends on the specific circumstances, including whether the employment relationship has been effectively ended or whether the contract has been legally “frustrated.” While many assume that being on disability leave eliminates their rights, the law is more nuanced, and in many cases, significant compensation may still be available.
Yes, employees on long-term disability can still receive severance in Ontario. In many cases, they may be entitled to significant compensation, especially if their employment is terminated before the contract is considered frustrated.
If you have been offered a severance package while on long-term disability, it is important not to sign it without understanding your full rights. You may also have a claim for wrongful dismissal or additional severance pay depending on your situation.
Can You Be Terminated While on Long-Term Disability?
Yes. An employer can terminate an employee who is on long-term disability. However, the key issue is not whether termination is allowed, but what the employee is entitled to receive when that happens. Under the Employment Standards Act, 2000 (ESA), employees who are terminated without cause are generally entitled to termination pay and, in some cases, severance pay. In addition, employees may be entitled to substantially more under the common law, which looks at factors such as age, length of service, position, and the availability of comparable employment.
At the same time, employers must comply with the Human Rights Code, which recognizes disability as a protected ground. This means that an employer cannot terminate someone because of their disability, and must accommodate the employee to the point of undue hardship. As a result, terminations involving long-term disability often raise both employment law and human rights considerations.
What Is Frustration of Contract?
Frustration of contract occurs when an employment relationship can no longer continue due to circumstances beyond the control of either party. In the context of long-term disability, this may arise when there is clear medical evidence that the employee will not be able to return to work in the foreseeable future. Under Ontario Regulation 288/01, made under the ESA, an employer is not required to provide termination pay if the contract of employment has become impossible to perform due to illness or injury.
However, frustration of contract is not automatic. Courts have made it clear that a prolonged absence alone is not enough. Instead, the analysis depends on factors such as the length of the absence, the nature of the employee’s role, and the likelihood of a return to work. This means that, in many cases, employees remain entitled to compensation even after a lengthy disability leave.
For a more detailed explanation, see our guide on frustration of contract in Ontario.
Are Employees Still Entitled to Severance While on Long-Term Disability?
In many cases, yes. Even where an employer argues that frustration of contract applies, employees may still be entitled to severance pay under the ESA if they meet the statutory requirements. More importantly, employees may have entitlements under the common law that go well beyond ESA minimums.
Ontario courts have repeatedly emphasized that long-term disability does not automatically eliminate an employee’s right to reasonable notice. For example, in N. v. Costco Wholesale Canada Ltd., 2010 ONSC 2651, the court examined whether an employee’s contract had been frustrated after a lengthy medical leave and highlighted the importance of medical evidence and timing in determining the employee’s entitlements. Depending on the circumstances, employees who are terminated while on long-term disability may be entitled to months or even years of compensation.
Why Timing Matters
One of the most important legal questions is whether the employment relationship ended before or after frustration of contract occurred. If an employee is terminated before the contract is considered frustrated, they are typically entitled to full severance and reasonable notice at common law. If frustration occurs first, the employer may argue that certain statutory obligations are limited, although this does not necessarily eliminate all potential claims.
Because of this distinction, timing becomes critical. Employers may delay making decisions about termination while an employee remains on long-term disability, particularly where there is uncertainty about whether the employee will return to work. This can have a direct impact on the employee’s legal rights and the compensation available.
Does Severance Affect Long-Term Disability Benefits?
In some cases, severance payments may affect long-term disability benefits, depending on the terms of the insurance policy. Many policies contain provisions that allow insurers to offset benefits based on income received from other sources, including severance pay. However, this is not universal, and the specific wording of the policy is critical.
Employees should review their disability policy carefully before accepting any severance package. Accepting compensation without understanding the policy wording could unintentionally reduce or interrupt ongoing LTD benefits, especially if the insurer treats severance as income that offsets monthly payments.
Key Takeaways for Employees
Employees on long-term disability should not assume that they have no rights if their employment ends. In Ontario, you can be terminated while on long-term disability, but you may still be entitled to significant severance. Frustration of contract is a complex legal concept that depends heavily on medical evidence and timing, and it does not automatically eliminate all entitlements. In many cases, common law notice will exceed ESA minimums by a substantial margin, making it important to fully understand your rights before accepting any offer.
Speak to an Employment Lawyer
If you have been terminated while on long-term disability, or if you are concerned about how your disability leave may affect your severance, it is important to seek legal advice before accepting any offer. Monkhouse Law Employment Lawyers advise non-unionized employees across Ontario on severance, long-term disability, and wrongful dismissal claims, and offer a free 30-minute phone consultation.