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What is an employee benefit really worth?

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In early 2007, Ian Wright, a lawyer and partner at Scott, Petrie, Brander, Walters & Wright LLP, in London, Ontario approached our firm with an insightful query. Ian, an employment lawyer, believed that the way employee benefits had been valued by legal counsel across Canada over the decades was inadequate. He intuitively knew that the methodology to calculate the true cost to employees of losing employee benefits when they were let go or left their place of employment, had not fully represented the true monetary value of the loss.

The issue that Ian had with the traditional method of valuing lost employee benefits centered on the fact that it did not represent what it would cost the former employee, as an individual, to purchase comparable benefits privately and at the same time place him or her in the same financial position as before his or her employment ended.

Issues that the traditional approach neglected to address include:

  • Employers are able to deduct their employee benefit contributions as a business expense while their employees receive these same benefits either tax-free or tax-deferred. If the same or similar benefits were purchased by a former employee privately, this individual would have to pay with his or her after tax dollars, leaving fewer dollars in the pocket of the affected former employee.
  • Employers are able to buy employee benefits at a reduced cost from insurance companies or other benefit providers because the cost of administration and risk of loss/cost of paid out benefit for these providers is spread out over a number of employees who form the group. A former employee would not enjoy such an economy of scale or dilution of risk. Instead, a former employee would be insured only on an individual basis. For such individual coverage, there is no dilution of the risk of loss to an insurance company or other benefit provider and any such provided would have proportionately higher costs of administration. As a result, a former employee would pay a substantially greater amount per benefit than those same benefits cost the employer and there is a question as to whether some of those benefits would even be available to an individual.
  • Lastly and of critical importance, the vast majority of employee group benefit plans do not discriminate whether someone is healthy or not and/or whether someone is a smoker or not. However, this does not apply when an individual applies privately for individual medical and dental, critical illness, short and long-term disability, long-term care or life insurance coverage. For example, smokers will pay substantially more for individual insurance coverage than if they were a part of group coverage. And for former employees who have health issues, there is the very real prospect that they will not qualify individually and will be denied coverage altogether.

Ian affirmed that the financial matrix used to show the true monetary value of a lost employee benefit should be represented in the total compensation in an employee’s severance package and furthered his argument with the following sound legal precedents:

  • The Ontario Court of Appeal in Davidson v. Allelix Inc., [1991] O.J. No. 2230 confirmed the law in Ontario is that a wrongfully dismissed employee may claim, in addition to lost salary, the pecuniary financial value of lost benefits flowing from such dismissal.
  • Soon after the Davidson decision, the case of Alpert v. Les Carreaux Ramca Ltee [1992] O.J. No. 769 concluded that the dismissed employee, Mr. Alpert, was entitled to compensation for the loss of coverage under the employee medical plan “ … calculated by reference to the cost to the defendant [employer] of maintaining the plan in favour of Mr. Alpert.”  NOTE: this method of calculating the compensation for the loss of coverage was suggested by Alpert’s counsel.
  • The Alpert decision was followed in the Connolly v General Motors of Canada Ltd. [1993] O.J. No. 2811, where the judge although dismissing the claim of the dismissed employee because the employer had cause to terminate Connolly, nevertheless went on to conclude that on the issue of compensation (had Connolly been wrongfully dismissed), “… the measure of the ‘pecuniary value’ was the amount the employer would have had to pay to maintain the benefits for the benefit of the employee during the notice period.”
  • However in the case of Habraken v. MacMillian Bathurst Inc. [1995] O.J. No. 1951, the court was again faced with the issue of valuing the dismissed employee’s benefits for the reasonable notice period.  The court noted that “No specific evidence was offered as to the value of these benefits to the employee or the cost to the employer.”  NOTE: In Habraken both employer and employee requested the court “to calculate these damages according to a percentage of the plaintiff’s annual salary of $46,500.”

In conclusion

The true value of a lost employee benefit is not a rote calculation. It is vitally important to determine with some accuracy the higher cost to a former employee of replacing lost benefits with similar benefits. These replaced benefits are paid for with after-tax dollars based on the former employee’s marginal tax rate. It is also important to determine whether certain portions of the lost benefits may not be available to an individual privately for any reason. As a result, the actual financial compensation for the lost benefits, which mitigate a former employee’s loss, becomes much greater than has been traditionally provided.

It is well worth the time and the investment to hire an expert in group employee benefits, with credentials and experience, to complete a proper evaluation of the true cost of lost benefits to a former employee. Under the circumstances, the sizeable benefit is definitely worth the marginal cost.

Nora Cole

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