Does your company 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. That is exactly what Douglas L. Titus did to his former employer — and he won at the trial level. Thankfully for employers, this decision was overturned by the Ontario Court of Appeal.
Mr. 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 due to downsizing. At the termination meeting, the employer offered Mr. Titus, in exchange for a release of all claims:
- two weeks’ salary in lieu of statutory notice;
- a gratuitous lump sum payment equivalent to 2.5 months’ salary; and
- continuation of benefits coverage for one month or until Mr. Titus found new employment.
Although he was given seven days to consider the severance package offer, Mr. Titus insisted on signing the release immediately. The release provided that Mr. Titus 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.
Mr. Titus contacted his employer one week later to advise that due to an inadvertent drafting error, the severance cheque could not be cashed. Mr. Titus then requested that the severance package be paid to his RRSP directly and the employer complied the following day. Two weeks later, Mr. Titus obtained new employment, albeit with less remuneration.
Approximately six months later, Mr. Titus filed a wrongful dismissal suit against William F. Cooke and successfully asked the court to set aside the release.
The Ontario Court of Appeal found that the trial judge had erred in setting aside the release. 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;
- 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.
Grossly unfair transaction
The court 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 relied on the following reasons:
- the employer had sought legal advice regarding the reasonableness of its offer;
- Mr. Titus’s previous stints working for William F. Cooke did not 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;
- Mr. Titus was not required to mitigate his loss of salary;
- by accepting the offer, Mr. Titus would avoid the delay, costs and uncertainty of litigation;
- although making a reference letter conditional upon acceptance of the offer could support a claim of unconscionability, such condition played a small part in these circumstances because Mr. Titus did not request a reference letter and obtained new employment very 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 (his resumé described him as senior counsel for two multinational corporations), Mr. Titus did not want or need legal advice.
The court acknowledged that an inherent imbalance of power exists between an employer and an employee whose employment is being terminated. Mr. Titus claimed the imbalance was magnified by the recent death of his father and his desperate financial situation. The court rejected these two arguments. William F. Cooke had given Mr. Titus time to deal with his father’s death, and Mr. Titus’s financial situation was inexplicable.1 The court questioned Mr. Titus’s debt load given his generous compensation during the previous 18 months, the fact that he was living with his parents and that he chose to put the severance money directly into his RRSP. The court did not provide an analysis for an employee who is truly in dire financial circumstances. Exploitation of vulnerability
The court found that William F. Cooke had not taken advantage of Mr. Titus’s vulnerability because:
- William F. Cooke 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;
- William F. Cooke gave Mr. Titus the opportunity, and urged him, to take time to consider the offer;
- upon acceptance of the offer, William F. Cooke paid Mr. Titus immediately; and
- William F. Cooke complied within one day of Mr. Titus’s request for payment of the severance money directly into his RRSP.
Lessons for Employers:
When employers offer a severance package to an employee, it is usually prudent to have the employee sign a release in exchange. To help ensure that the release will be enforceable, it may be helpful to adopt the following practices:
- 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;
- do not make a reference letter conditional upon acceptance of the offer; and
- once an offer is accepted, process payment of severance funds promptly.