It is a common, if unexpected, scenario. You run a business. For good business reasons, you dismiss an employee. He or she is paid what is owed under their contract of employment and the Employment Standards Act 2000. Next, you get a letter from a lawyer demanding more, or else. You are advised by your Insurer that your Commercial General Liability insurance policy does not cover these sorts of claims. You are responsible for the costs of defending the action. If you are a smaller employer without in-house counsel, these costs could be significant.
Due to situations like this, Employment Practices Liability Policies, often called “HR Malpractice Insurance” has become increasing popular. This line of insurance, although common in the United States, has only recently gained traction in Canada with several large Insurer’s presently carrying some variation of this product. Traditional Commercial General Liability policies often walled off coverage relating to any negligence or errors in terminating employees unless specific optional coverage was obtained. In contrast, EPL policies have been designed specifically to cover and indemnify employers from claims brought by their former (or current) employees for actions arising from the conduct of employers, and its employees, during the course of an employment relationship. The most common claims are wrongful dismissal, harassment, and discrimination by an employer. Although the specific coverage varies from policy to policy, most EPL policies will cover the legal fees associated with defending a claim as well as any damages stemming from the manner in which an employee was dismissed. Notably, EPL policies will usually not cover damages attributed to insufficient notice of termination.
Recent legislative changes and jurisprudence make the purchase of EPL insurance particularly attractive to employers. A recent Court of Appeal decision, Wood v. Fred Deeley Imports, 2017 ONCA 158, found a longstanding termination clause to be invalid for failure to mention entitlement to severance pay, despite the employer having paid the required amounts under the Employment Standards Act 2000. In early 2018, the Court of Appeal released the decision, Nemeth v. Hatch LTD, 2018 ONCA 7, which suggested that unlike in Wood, silence on issues of severance and benefits continuation would not necessarily render the clause invalid where it did not explicitly limit these entitlements. These two decisions are not necessarily incompatible with each other due to the specific facts in each case. However, they have continued to muddy the waters around the validity of termination clauses.
With the Supreme Court of Canada’s explicit endorsement in Hryniak v Mauldin, 2014 SCC 7, that summary judgment motions should be utilized in the employment context, claims can be resolved by a judge within months of the claim being issued. While these motions are an effective way of resolving a dispute, they are resource intensive and add increased upfront costs to the employer. A recent decision on costs by Perell J., in Cosolo v. Geo. A. Kelson Limited, 2017 ONCS 4928 found an employer liable for $96,013.32 in legal fees in addition to its own counsel’s fees, after the employee’s successful summary judgment motion.
In contrast, Precidio Design Inc. v. Great American Insurance Co., 2013 ONSC 7148, relieved an employer of its $239,420.83 legal bill when Perell J. found that the applicant Precidio Design Inc.,was entitled to coverage under an EPL policy.
While administrative tribunals usually do not provide for an order of costs against an employer, Ontario has removed the monetary limits on claims at the Human Rights Tribunal and Labour Relations Board. Employers are now faced with greater exposure to large awards. A prime example is the Ontario Human Rights Tribunal decision of Fair v. Hamilton-Wentworth District School Board, 2013 HRTO 440, which was upheld by the Ontario Court of Appeal in 2016. In that decision, the employer’s failure to accommodate a teacher resulted in an Order for reinstatement, with back pay, after 10 years, in addition to $30,000.00 for injury to dignity, feelings, and self-respect.
With the proliferation of increasingly accessible judicial and administrative forums, litigation arising out of the employment relationship is on the rise. While the best offence is a timely consultation with an employment lawyer prior to a dispute, recourse to an EPL policy will be a welcome advantage the next time your business receives a demand letter.
