Upon termination where a severance agreement is reached and provides more than  a contractual entitlement, an employer should require the terminated employee to sign a release. The goal of a release is to free the employer from any future liability or claim arising from the termination.

Relevant Considerations

For a release to be legally binding, the settlement agreement, the associated release, and the surrounding circumstances must meet the following requirements:

  1. The language of the release must be drafted with particularity to the claim itself: the release must specify what is included, explicitly or implicitly, and it must clearly extinguish all of the employee’s potential claims. For example, to prevent a future human rights complaint, the release must specifically release the terminated employee from launching any human rights claim in future (Dumitrache v Glenlyon-Norfolk School Society, 2019 BCHRT 68). Further it should reference if there is any current allegation about a human rights breach. As one cannot contract out of human rights legislation, having this kind of provision is critical to ensure an employer can defend any future complaint, if necessary.
  2. There must be adequate consideration between the parties: like in all contracts, there must be an exchange of consideration, or value, between the parties. In the employment context, the court may find a failure of consideration where the employer does not provide the employee with monies or benefits that the employee was otherwise entitled to;
  3. There must be no unconscionability: the court may find that there was an inequality of bargaining power, a grossly unfair transaction, a lack of independent legal advice, or a situation where one party took advance of the other party’s vulnerability. The court will consider whether the terminated employee only executed the release because of financial need (Cain v. Clarica Life Insurance Company, 2005 ABCA 437);
  4. 4. There must be no duress: similar to unconscionability, this analysis looks beyond the drafting the agreement and release. Duress considers whether there were any threats of violence or other pressures against a party (but will not be established where there is simply stress or unhappiness that results from the regular feelings associated with termination);
  5. The knowledge of the party executing the release: the court will also consider whether the terminated employee understood its right under the relevant statutory regime. For example, whether the party understood its entitlement under the Employment Standards Act or the Human Rights Code. Here, the court may also consider whether the terminated employee was considering launching a separate claim not contemplated by the release;
  6. Evidence of lack of capacity, mistake, forgery, or fraud: as with other contracts, a finding that the employee lacked capacity to execute the release, or if there was mistake, forgery, or fraud, this may also invalidate the release.

Lessons for Employers

With respect to drafting, employers should ensure that the release adequately extinguishes all potential claims that could arise from the termination. The employer should also ensure that the terms ensure the employee gets something of value from the release, over and above what the employee is already owed based on the minimum standards set out in the statutory regime.

With respect to other considerations, the employer should ensure that the employee is provided with adequate time to consider the severance package. Rushing the employee into executing the agreement is more likely to cause issues later if an employee decides it wants to pursue litigation and tries to invalidate the executed agreement. Generally, an employer should ensure that the employee was not pressured to sign the agreement and understands the relevant rights and statutory regimes. A good way to ensure this is by confirming whether or not the employee received legal advice.

Being careful about individualizing each release will ensure it can be used as a defence in every given scenario.

 

This article was published by HR Reporter on June 1.

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