Does your Canadian business ask employees to sign releases in exchange for their severance packages? Imagine if an employee took the severance package, signed the release, then sued your company anyway.
Titus was a lawyer with 25 years of experience. He started working for William F. Cooke Enterprises Inc. on March 28, 2000. His employment was terminated 18 months later because of downsizing. At the termination meeting, the employer offered him a severance package of three months salary and some continued benefit coverage in exchange for a release of all claims:
Although Titus was given seven days to consider the severance package offer, he insisted on signing the release right away. The release meant that he released his employer and its related companies from all actions, causes of actions, suits, and complaints arising from his “hiring by, employment with and cessation of employment with the Employer.”
Above the space for the signature, the release concluded with the following words in highlighted capital letters:
I HAVE READ THIS DOCUMENT AND I UNDERSTAND THAT IT CONTAINS A FULL AND FINAL RELEASE OF ALL CLAIMS THAT I HAVE OR MAY HAVE AGAINST THE RELEASEES. I AM SIGNING THIS DOCUMENT VOLUNTARILY.
A few weeks after Titus’ termination, he started a new job, although for less pay.
Approximately six months later, Titus filed a wrongful dismissal suit against William F. Cooke and successfully asked the trial court to set aside the release. The employer appealed the decision to the Ontario Court of Appeal.
The Court of Appeal found that the trial judge was mistaken in setting aside the release and said that a release should only be set aside if it is “unconscionable.” The court applied the following test for unconscionability:
- a grossly unfair and improvident transaction;
- a victim’s lack of independent legal advice or other suitable advice;
- an overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or similar disability; and
- the other party’s knowingly taking advantage of this vulnerability.
Let’s take a look at those four factors:
Grossly unfair transaction. The Court of Appeal found that the employer’s offer of three months’ salary was not grossly unfair even though the trial judge had ultimately determined that the reasonable notice period was 10 months. The Court of Appeal relied on the following reasons:
- the employer had sought legal advice regarding the reasonableness of its offer;
- Titus’ previous stints working for William F. Cooke didn’t serve to increase the reasonable notice period because he had received separate severance payments each of those times;
- upon acceptance of the offer, the money was payable immediately;
- a dismissed employee normally must make efforts to avoid or “mitigate” lost pay and benefits by finding new employment, which Titus wasn’t required to do;
- by accepting the offer, Titus avoided the delay, costs, and uncertainty of litigation;
- although making a reference letter conditional upon acceptance of the offer could support a claim of “unconscionability,” Titus didn’t request a reference letter and obtained new employment quickly; and
- making the severance offer conditional on the release was not grossly unfair because the release contained standard terms and it was fair for the employer to propose such an exchange.
Absence of legal advice. As a senior lawyer with extensive experience in contract and employment law, Titus didn’t want or need legal advice.
Imbalance in bargaining power. The Court of Appeal acknowledged that an employer has more bargaining power than a dismissed employee. Titus claimed the imbalance was magnified because his finances were terrible and his father had just died. The court rejected those two arguments. William F. Cooke had given Titus time to deal with his father’s death. The court found Titus’ evidence regarding financial hardship to be unconvincing.
Exploitation of vulnerability. The court found that William F. Cooke had not taken advantage of Titus’s vulnerability because:
- the employer had sought legal advice before making its offer;
- the offer was not unreasonable;
- the termination was conducted in a private office;
- the termination was conducted in a polite and professional manner;
- the employer gave Titus the opportunity and urged him to take time to consider the offer;
- upon acceptance of the offer, Titus was paid immediately; and
- the employer quickly complied with Titus’s request for payment of the severance money directly into his tax deferred savings plan.
Lessons for employers
When you offer a severance package to an employee, it’s usually prudent to have the employee sign a release in exchange. To help ensure that the release will be enforceable, it will be helpful if you:
- give the employee a reasonable period of time to consider the offer and, if desired by the employee, to seek independent legal advice;
- advise the employee in writing that he or she has the right to seek independent legal advice;
- seek legal advice regarding the reasonableness of the severance package;
- conduct the termination in private;
- conduct the termination in a polite and professional manner;
- don’t make a reference letter conditional upon acceptance of the offer; and
- once an offer is accepted, process payment of severance funds promptly.