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Two Rules To Protect Your Startup When Employees Leave

Building a company certainly comes with challenges and pressures, including preventing your top talent from hitting the free agency market (especially in Toronto’s highly competitive startup space). Although employee benefits plans improve retention rates and employee satisfaction, the reality is that employees will come and go. When they go, you need to make sure you have your bases covered to avoid costly consequences.

Rule 1: Have departing employees sign a waiver outlining their rights

When an employee leaves your company and therefore also leaves your health benefits plan, they have 31-day window to convert their health, life or dental coverage to an individual policy before their previous coverage is cut. No medical underwriting is required if the conversion is done within the 31-day timeframe following their departure from the company.

It’s safe to assume that most employees aren’t aware of this right. In some cases, the health plan administrator doesn’t know or forgets to inform the employee upon termination or resignation. That’s why we recommend having employees sign a waiver as part of the departure process that outlines this right. It’s the best way to avoid any future liabilities.

There was an individual who was making $75,000 at a startup with a life insurance policy as part of his employee benefits plan of two times his annual salary, so $150,000. He was terminated by the company. Unfortunately, he passed away unexpectedly on the 26th day of the 31-day conversion period and hadn’t converted his life insurance to an individual plan.

His family went to court and argued the fact that if he had been informed, he would have converted his benefits plan. The former employee came back and said that he was told. There wasn’t anything in writing or supporting documentation to back this up. The family ended up winning the lawsuit and the employer had to pay all of the legal fees plus the court costs and the life insurance.

A simple waiver could have prevented this hefty hit to the company’s cash flow and reputation.

Rule 2: Don’t cut corners with termination notice periods

Many employers don’t know that their health benefits coverage needs to be extended for the same duration as an employee’s termination package, regardless of the length of severance pay and termination notice period.

In the case of Brito vs. Canac Kitchens, a 60-year old man was fired without cause after 24 years of service. His employer, Canac Kitchens, gave the employee only 8 weeks termination notice even though the contract required between 16 – 19 months’ notice.

The employee went on to work for a different kitchen manufacturer that didn’t have disability coverage and became seriously ill with cancer. Had Canac provided the termination notice they were contractually required to, the employee would have been covered by the disability insurance in Canac’s health benefits policy.

He took it to court. Here’s what happened:

The justice ordered the employer to pay the employee what he would have received from insurance during a “reasonable notice” period of 22 months plus an additional $15,000 in “ancillary damages” having regard to “Canac’s cavalier, harsh, malicious, reckless, outrageous and high-handed treatment” of the employee.

As an employer, it’s your responsibility to execute your due diligence and always cover your bases to avoid legal consequences that could take a toll on your bottom line. Consult IPFS about how to reduce your startup’s risk when employees leave or are terminated.