How Do Long-Term Disability Benefits Affect Severance Pay in Alberta?

What counts as “severance” when an employee is on LTD in Alberta

In Alberta, “severance pay” usually refers to compensation owed to a terminated employee beyond the statutory minimum termination notice or pay. That extra amount is a common-law claim for “reasonable notice” damages, not a fixed formula set by legislation. Alberta.ca states this directly: severance pay is determined under common law and not required under the Employment Standards Code. Long-term disability (LTD) benefits, by contrast, are income-replacement payments an insurer makes under a group benefits plan when an employee cannot work because of illness or injury. Because both severance damages and LTD benefits are meant to replace the same lost income for the same stretch of time, the two can overlap, and courts have had to decide whether an employee can collect both in full for that overlap.

The deduction rule: Sylvester v British Columbia

The controlling law here is federal, meaning it applies the same way in Alberta as it does everywhere else in Canada. In Sylvester v British Columbia, the Supreme Court of Canada confirmed the baseline rule that an employee dismissed without adequate notice is entitled to damages equal to the salary they would have earned during the notice period, and that the fact the employee could not have worked because of disability is irrelevant to that baseline entitlement. But the Court went further and ruled on the specific question of whether LTD benefits received during the notice period must be deducted from those wrongful dismissal damages. It allowed the employer’s appeal against a lower court award that had given the employee both his full salary and the disability benefits on top of it.

The facts in Sylvester show what the deduction looks like in practice: the employer had offered the terminated employee, who was receiving disability benefits at the time, severance of 12.5 months’ salary, less any disability benefits received during that time, and the Supreme Court’s ruling upheld that deduction approach rather than the “collect both in full” result the employee had argued for.

Time on LTD still counts toward your severance entitlement

A separate question is whether time spent off work on LTD shortens an employee’s length of service, which matters because longer service generally supports a longer notice period. In Alberta, it does not. The Employment Standards Code sets out job-protected long-term illness and injury leave in Part 2, Division 7.5, and employees on that leave are treated as continuously employed for the purpose of calculating years of service. An employee who spends part of their employment on LTD does not lose credit for that time when their statutory termination pay or common-law notice period is later calculated.

What employers do and don’t owe during LTD leave

Being on long-term illness and injury leave does not obligate the employer to keep paying wages or benefits. Alberta.ca confirms that employers aren’t required to pay wages or benefits during this leave unless the employment contract or a collective agreement says otherwise. This is part of why the LTD insurer, not the employer, is usually the one paying income replacement during the leave, and why the deduction question in Sylvester arises against insurer-paid benefits rather than employer-paid wages.

A worked example

Consider an employee in Alberta with 6 years of continuous service, including a final 4 months spent on long-term illness and injury leave, who is then terminated without cause while still receiving LTD benefits. Because time on LTD leave counts as continuous service, the 6 years stands for calculating both statutory termination pay and common-law reasonable notice. If reasonable notice is later assessed at 9 months of damages, and the employee received LTD payments during part of that 9-month period, Sylvester requires the LTD amounts received during the overlap to be deducted from the salary-based damages for that same stretch, rather than paid in addition to them.

Common mistakes

• Assuming LTD and severance simply add together. Sylvester specifically rejected that outcome for the overlapping notice period; LTD benefits received during that period reduce the salary-based damages rather than stacking on top of them.
• Treating severance as something the Employment Standards Code guarantees in Alberta. Severance beyond the statutory minimum is a common-law claim in Alberta, so the amount depends on the circumstances of the dismissal rather than a fixed statutory table.
• Believing LTD leave resets or shortens years of service. Alberta’s Division 7.5 protects continuous service credit through the leave, so time spent on LTD should not be subtracted when calculating notice or termination pay.
• Assuming the employer must keep paying wages during LTD leave. Unless the contract or a collective agreement says otherwise, Alberta employers are not required to continue wages or benefits once an employee is on long-term illness and injury leave.