Smithson: Unconscionable employment releases not binding

A form of release is to provide the employer with comfort that the individual will not commence future court actions.

A prudent step for employers settling claims with departing employees is to obtain the person’s signature on a form of release.

The purpose of a release is to provide the employer with comfort that the individual will not commence future court actions or other complaints relating to the employment.

Typically, an employment-related release is intended to protect the employer against all manner of civil actions (such as wrongful dismissal) as well as administrative complaints under statutes relating to human rights, employment standards, personal information, etc.

It usually is intended to apply to all circumstances relating to the employment (and the cessation thereof) regardless of whether those circumstances are presently known to the individual.

A release is intended to be a binding, contractual document and should not be entered into lightly.

Its impact on the individual can be significant and careful consideration, including obtaining legal advice, is highly recommended.

That is because, once signed, a release can be difficult to overturn.  In Ontario, a few years ago, a decision of the Superior Court of Justice exemplified how difficult it can be for an individual to escape the impact of a release.

Barr’s employment as a territory sales manager with Pennzoil-Quaker State Canada Inc. was terminated after almost 15 years.

Barr was offered, and accepted, a severance package and in the course of doing so he executed a full general release.

The severance package included one year of base salary as a lump sum, the continuation of benefits for two months, payout of accrued vacation pay, and access to career counseling services.

Barr was given two weeks to consider the proposal and to obtain financial and legal advice as he saw fit.

Ultimately, Barr signed the release without questioning any aspect of the severance package.

Subsequently, he sued Pennzoil-Quaker State for wrongful dismissal, seeking greater pay in lieu of notice of his dismissal.

The court emphasized that law courts will be slow to set aside a release and settlement agreement between parties where valuable consideration has been exchanged.

It found that, in accepting the terms of the release, Barr had not been subject to duress.

Although he was subject to economic pressure, he did not protest and had alternate steps available to him.

He obtained financial advice but made his own decision not to get independent legal advice.

The court characterized the employer’s conduct—it effectively threatened Barr when it told him he would get nothing if he didn’t accept their offer—as especially unconscientious, but  the court still upheld the release because the severance package was within the range of what was acceptable in Barr’s circumstances.

In a more recent decision from Ontario, the opposite result occurred.  Rubin sued Home Depot Canada Inc. for wrongful dismissal after his employment was terminated.

He had been employed for 20 years and was 63 at the time of termination.

On the day his employment was terminated, Rubin signed a release.

But, after later obtaining legal advice, his view was that the release should not be enforced.

In exchange for his signing the release, Rubin had been offered a settlement which Home Depot told him exceeded their statutory obligations.

What Home Depot didn’t tell Rubin was that the pay offered exceeded the employer’s statutory obligation by only ? of a week.

In assessing Rubin’s claim, the Ontario Court of Superior Justice cited four necessary elements for finding that a release is unconscionable: the transaction in which it was given must be grossly unfair or improvident; the signor of the release must not have obtained suitable advice before signing; there must be an imbalance of bargaining power causing the signor to be vulnerable; and the recipient of the release must have taken advantage of that vulnerability.

The court found that Rubin’s circumstances met all four factors and thus set aside the release Home Depot had obtained from him.

It concluded: “Rubin did not agree to anything. He simply accepted what he was misled into thinking was his only option,” and awarded him damages representing 12 months’ wages and benefits.

To emphasize its conclusion, the court also stated, “employers cannot use their superior position to mislead an employee into an agreement that is unconscionable.”

Employers would be well-advised, when planning the process of termination of employment, to keep those words in mind.