When an employer dismisses an employee on an indefinite contract with no termination provision, it is standard practice to offer a severance package that goes beyond the statutory minimum, and require the employee to sign a release in exchange. Where the employee takes the deal and signs the release, but later brings an action for wrongful dismissal, the enforceability of the release is a key issue.
In Titus v. William F. Cooke Enterprises Inc., the employer appeared to do everything right, but at trial, the release was nonetheless set aside. The trial judge took an unexpected step and turned to the principles in Wallace v. United Grain Growers to evaluate the release. The trial judge held that the release was unfair and represented an exercise of power by an employer in a secure position over an employee in a very insecure one. The court concluded that the release represented a breach of good faith and set it aside. The Ontario Court of Appeal disagreed with the trial judge’s reading of Wallace, holding that the judge had failed to recognize the distinction in Wallace between a substantive tort of bad faith discharge, which was rejected, and enhanced damages for bad faith conduct by the employer in the manner of dismissal, which were accepted. And so, the Court of Appeal proceeded to assess the release under the traditional considerations of “unconscionability.”
The plaintiff, Douglas Titus, was a very experienced in-house corporate counsel with extensive exposure to contract and employment law. He had 18 months’ service with the employer. When the employer terminated him as part of a broader downsizing, Titus was offered a separation package of three-months’ salary, with a requirement to execute a release of all claims against the employer. The employer indicated that Titus would be paid his termination pay entitlement under the Employment Standards Act whether or not he accepted the separation package. The employer gave Titus a week to decide whether or not to accept the package, and encouraged him to take it home over the weekend. Titus declined to wait, and signed the release on the spot.
To analyze the release, the Court of Appeal relied on the Alberta Court of Appeal decision in Cain v. Clarica Life Insurance Co., requiring four elements for unconscionability:
- a grossly unfair and improvident transaction;
- the 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 knowingly taking advantage of this vulnerability.
Although the reasonable notice period was determined at trial to be 10 months, the Court of Appeal concluded that the offer of three months in the separation package was not grossly unfair. The Court pointed out that accepting the offer would give a number of advantages to the employee: he would receive the money immediately; he could seek new employment without setting off that income against his damages; and he would avoid the delay, costs and uncertainty of litigation. The Court also noted that the employer sought legal advice in preparing its offer.
The Court suggested that a threat to withhold a letter of reference could provide support for an employee’s claim that a release was unconscionable. On the facts before it though, the Court held that the issue was insignificant to the employee and he never requested such a letter.
The Court held that there was no lack of advice, as the employee was a senior lawyer with extensive experience in contract and employment law. In other words, Titus only had himself to blame when it came to the effect of the release.
The Court acknowledged the presence of certain factors pointing to Titus’s vulnerability, including the fact of the dismissal, the recent death of his father, and his high personal debt load. At the same time, the Court showed little sympathy for Titus’s financial difficulties, noting his high salary and the fact he placed most of the severance money in his RRSP account. More significantly, the Court concluded that because Titus was a senior lawyer and knew his options, his vulnerability was diminished.
Taking Advantage of Vulnerability
The Court found nothing problematic in the employer’s conduct. The Court highlighted that the employer sought legal advice about an appropriate severance package, prepared a reasonable package, presented the package in private, in a polite and professional manner, and strongly advised Titus to take time to consider the offer.
Having reviewed the factors, the Court concluded that there was no unconscionability and the release was valid and enforceable.
Some Final Remarks
The Court of Appeal’s decision is significant because it reverses the trial judge’s attempt to import the bad faith analysis of Wallace into the evaluation of releases. The case reaffirms the role of unconscionability as the appropriate measure for a release.
The case also serves as a reminder that employees who know their options (because they have access to proper legal advice) and have time to consider their options, have their eyes wide open. Employees who accept severance offers and sign releases when aware of the consequences will likely have a very difficult time escaping that choice at a later date.