Negligent misrepresentation during recruitment process costs employer $83,000
Providing misleading information to an employee during the recruitment process about the eligibility for an employee benefits program cost an employer $83,000
Feldstein v 364 Northern Development Corporation
Mr. Feldstein applied for a software engineer position with 364 Northern Development Corporation (“the Company”). Before accepting the position, Mr. Feldstein asked the Company’s Chief Information Officer (“CIO”) about the eligibility requirements for the Company’s long-term disability (“LTD”) plan. As Mr. Feldstein suffered from cystic fibrosis, this information was very important to him, as he believed that he would require substantial LTD benefits in the future.
The CIO provided Mr. Feldstein with a brochure which summarised the Company’s LTD benefits, which contained a “proof of good health” clause. When Mr. Feldstein asked what this clause meant, the CIO explained that he would qualify for LTD benefits after working for the Company for three months. Based on this information, Mr. Feldstein accepted the position and signed an employment contract.
The employment contract in question contained the following “entire agreement” clause:
“This Agreement constitutes the entire agreement between the parties and supersedes all prior communications, representations, understandings and agreements whether verbal or written between the parties with respect to the subject-matter hereof.”
The purpose of an entire agreement clause is to prevent parties who have entered into a final contract from invoking prior discussions or understandings to give a different meaning to its provisions.
However, the contract did not contain any details of the benefits plan. Instead, the clause in the contract stated:
“The Employee shall be entitled to participate in all rights and benefits under any life insurance, disability, medical, dental, health and accident plans maintained by the company for its employees generally. In addition, the Employee shall be entitled to participate in all rights and benefits under other employee plan or plans as may be implemented by the Company during the term of this Agreement.
Shortly after accepting the position, Mr. Feldstein applied for LTD benefits as his health deteriorated significantly. He expected to receive full coverage of up to $5000 per month. Instead, Mr. Feldstein was only eligible for $1000 per month because he had not completed a medical questionnaire which was required to establish “proof of good health.” Mr. feldstein sued the Company for negligent misrepresentation.
The trial judge made the following findings:
- the CIO’s explanation of “proof of good health” was inaccurate and misleading;
- the Company was negligent in making this representation as the CIO had not taken any steps to verify the accuracy of the information he provided and the Company failed to provide Mr. Feldstein with the required medical questionnaire
- it was reasonable for Mr. Feldstein to rely on the information the CIO provided; and
- Mr. Feldstein would not have accepted an employment offer that did not provide adequate LTD coverage and acceptable eligibility requirements due to his health concerns.
The Company attempted to argue that the entire agreement clause in the employment contract meant that Mr. Feldstein could not sue for negligent misrepresentation. The court rejected this argument, as the CIO’s statement relating to the meaning of “proof of good health” was not an express term of the contract. As it was a matter outside of the contract, the clause could not exclude liability for pre-contractual misrepresentation.
Mr. Feldstein was awarded $83,336.80 as compensation for lost LTD benefits and $10,000 for aggravated damages. On appeal, the award for loss of benefits was upheld, but the aggravated damages were overturned.
Lessons to be learned
- Anyone interviewing a job applicant should provide accurate information concerning employee benefits; otherwise, the organisation may be required to self-insure for the value of benefits that are subsequently denied by the group insurer.
- Including an entire agreement clause in a contract like the one cited above does not always protect an employer from negligent misrepresentations made during the hiring process.
- It is important to periodically review employment contracts including entire agreement clauses and clauses dealing with group benefits to ensure they still protect employer interests in light of recent developments in the law.
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