Tuesday, July 17, 2012

Full & Final Release Found to be Unconscionable

Occasionally, I have seen employers offering no more than the statutory minimum payment and asking for a full and final release.  For example, let's say you have an employee with between 4 and 5 years of service being dismissed for business reasons, under such circumstances that she is entitled to receive her termination pay, under the ESA, no later than, for example, August 1st.  Some employers will say "We are prepared to offer you four weeks' pay in lieu of notice provided that you sign and return a full and final release to us by July 31st".

There are a few problems with this.  In particular, even if one assumes that the pay in lieu includes everything to which the employee is statutorily entitled, it's still not going to be enforced if signed, because there's a lack of consideration.  The employee doesn't actually get anything by signing the release.  On the flip side of the same coin, the employee gets nothing by signing.

I never advise my employee clients to sign the release in such circumstances.  (See footnote.)  Rather, I find that the appropriate avenue is for me to send an immediate letter calling the employer on the bad faith offer, telling them that we're not signing the release, we still expect payment of the stat minimums by the required date, and a further proposal to satisfy my client's additional entitlements will be forthcoming.  It's the more honest, forthright, and good faith response, and a judge will prefer to see that than a fight about whether or not the release is enforceable.

But what happens when an employee gets a release offering the statutory minimum payment...plus $1?  The employer will rightly tell the employee that the offer "exceeds" his entitlements under the Employment Standards Act.  The employee might therefore sign it, completely oblivious to the fact that his entitlements aren't limited to ESA claims.

This was essentially the case in Rubin v. Home Depot, decided in May by Justice Lederer.  Mr. Rubin was dismissed at a time when his statutory entitlements to notice and severance amounted to approximately 27.75 weeks' pay.  In his termination meeting, he was presented with a termination letter offering him 28 weeks, which Home Depot noted would "exceed our obligations under the Employment Standards Act."  True.

The letter contemplated that he could take up to a week to sign.  Still, he signed it in the termination meeting.

Sidebar:  In my law school employment law class, I recall the instructor being asked about a scenario very much like this one:  "What happens if the employee wants to sign the release right away?".  There are times when I disagreed (and still disagree) with some of the instructor's conclusions, but this one was nailed:  "Don't let them."  Frankly, it isn't one-sided.  If we were talking about an offer that was a semi-reasonable approximation of the notice period, then it might be a tougher case.  But in the Rubin case, the employer made a mistake by allowing Rubin to sign right away.

There doesn't appear to have been a real allegation of pressure, but it appears that Rubin's position was that he was shocked by the termination and not thinking clearly (this is a very normal experience upon termination), and was under the impression that he didn't have another option other than Home Depot's package.

Rubin says that he 'immediately' realized he had made a mistake by signing, and contacted his accountant and family lawyer, and was subsequently referred to an employment lawyer, who sent a demand 8 days after the termination.

Home Depot argued that there was no pressure, that Rubin made inquiries about RRSP rollovers, and that even in conversations with Home Depot personnel in subsequent days he expressed no concerns about the release.

Rubin argued that the release was "unconscionable".

Unconscionability: The Titus test

There are four elements necessary to set aside a contract as "unconscionable".  All four criteria are essential.

  1. A grossly unfair and improvident transaction;
  2. Victim's lack of independent legal advice or other suitable advice;
  3. Overwhelming imbalance in bargaining power caused by victim's ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or other disability; and
  4. Other party's knowingly taking advantage of this vulnerability.

This is not an easy test to satisfy.

On the facts

(1)  Grossly unfair and improvident transaction

Rubin's counsel made arguments to the effect that Rubin was in a worse position for having signed the release than he would have been without.  Justice Lederer felt that the arguments were unnecessarily complicated (and on the judge's summary of the argument, I agree):  It boils down very simply.  Mr. Rubin was a 63-year-old employee with nearly 20 years of service, and the notice period of six months is "far removed from what the community would accept".

(2)  Victim's lack of ILA

The letter gave Rubin the option of taking a week to consider his options.  But Home Depot's evidence on the point was scarce.  It doesn't sound like this was drawn to Rubin's attention in the termination meeting.  It doesn't sound like they encouraged Rubin to get independent legal advice, or to take some time to think about his options.  Rather, the letter gave the impression that he had no other options, and moreover suggested that he had to sign in order to get any of the promised money, despite the fact that almost all of it was statutorily required.

(3)  Overwhelming imbalance in bargaining power

This is always the tough one, usually requiring something which prevents the person from knowing or understanding what it is he's signing.  In the ordinary course, a lack of appreciation of the scale of the effects won't be enough.

In this case, however, Justice Lederer embarked on an analysis of the natural imbalance of power between employers and employees, which is now well-established in employment law.  This isn't universal, for the purpose of the unconscionability test.  Where the employee is a high-level employee with professional training, that can offset the power imbalance.  But not so for Mr. Rubin.

Ordinarily, I would object in principle to suggesting that the relative unsophistication of the average employee is akin to illiteracy or language deficiencies.  But this case isn't entirely decided on that.  Mr. Rubin's evidence was that "When Mr. Fraser told me I was losing my job I felt like I had just been hit by a truck.  My mind started spinning and my heart began to race."

Which is normal.  Anyone who deals with dismissed employees regularly has heard this over and over again. When you fire somebody, there's a tendency for there to be a shock reaction.  Even where the employee saw it coming, even where the employee wanted to leave, it's not so different.  I've seen circumstances where the employee had a notice of resignation ready to go and had quietly removed most of his effects when the employer beat him to the punch - in that case, it's even good for the employee, yet the shock reaction is still the same.  People handle it differently, but almost everyone experiences it to some extent.

And that shock reaction, combined with an overall imbalance of bargaining power, is apparently enough to meet the third element of the test.

(4)  Other party's knowingly taking advantage of the disability

This is a trickier analysis in this context.  Ultimately, the judge decides it by looking at the termination letter itself.  It is ambiguous in respect to his benefits, and more importantly does not really appear to give him a choice.  It appears to say, on the whole, "Here's the deal, take it or you get nothing."  The judge notes that the letter said only that the offer was more than his statutory requirements, without explaining how much more, and without alluding to the fact that there may be further entitlements beyond the statutory minimum, and concludes that the letter "was arranged in that expectation that it would direct, if not compel, Eric Rubin to sign the release".

Accordingly, the release was set aside, and Mr. Rubin was awarded pay in lieu of 12 months.


First and foremost, employees, if you're reading this in contemplation of whether or not to sign a release, consult a lawyer.  Do not count on being able to rely on this doctrine.

Secondly, if you're reading this because you have signed a release without legal advice, still consult a lawyer.  Because there may be arguments to be made for setting aside a release, and you'll need a lawyer to look at your specific circumstances to get an opinion on the matter.

This is an important precedent, but not entirely broad:  A non-managerial non-professional employee, at the point of termination, will likely satisfy the third element of the Titus test.  That's a big deal.  But there's more to the test.  But for the fact that the consideration for the release was only very slightly above the statutory minimum, or the fact that the consideration was portrayed as being generous, or the fact that the offer had internal ambiguities, or the fact that no independent legal advice was suggested, the result could have been different.  Had the managers in the termination meeting strongly encouraged Mr. Rubin to take home the offer to think about it, the result likely would have been different.  Had Mr. Rubin taken home the offer for a couple of days and then returned it signed, the result almost certainly would have been different.

On FMC's Labour and Employment Law Blog, lawyer Kristin Taylor argues the following:
The Court’s willingness to intervene, not because the termination letter was misleading, but because it determined the agreement was grossly unfair, is of concern. It creates unpredictability if employers are not able to rely on compromise agreements reached with their employees because the employee may simply be able to renege without consequences.
Respectfully, I strongly disagree with this argument.  The Titus test is a multi-faceted test, requiring the Court to assess not only whether or not the deal is grossly unfair, but also whether the circumstances of the signing of the deal are such that a party is being taken advantage of.  It is incumbent upon the Court to assess whether or not a deal is "grossly unfair", and what the employee's entitlements would have been but for the deal are certainly fair game.  (I have argued that an employment contract signed at the point of hire limiting the employee to the statutory minimums only will never be unconscionable, because of the role of the ESA.  However, this is different, because of the pre-existence of common law entitlements at the point of termination.  We're talking about an employee who is entitled to - on the Court's rather conservative finding - an extra six months' pay, and he's signing it away for a day and a half's wages.)

More importantly, this decision is easy for an employer to control for.

Just by virtue of firmly telling the employee not to sign the release the same day, I would expect employers to be reasonably well-insulated from the consequences of this decision.  Of course, there are other aspects to a good termination letter as well, to further protect the release from being set aside.

I never ask someone to sign a release without directing the person to get independent legal advice first.  It's a proviso in most boilerplate releases that the releasor has had an opportunity to get such advice or has freely declined to do so, and so they should be encouraged to do so (outside of the text of the release, which always has dense language), and they should always have a meaningful opportunity to do so.

Personally, I'm a fan of the bifurcated termination offer:  Give a termination letter which explains the ESA minimums and says "You will get this, regardless."  At the same time, give a without prejudice offer saying, "If you sign this release, you'll get this too.  If not, you'll only get what's outlined in the termination letter."  Whether in one letter or two, ideally you should break it down for the employee, to make it clear that you're not threatening to withhold the stat minimums if they don't sign the release.  That threat, whether implied or express, will appear to be bad faith.

I've seen other bloggers suggesting that a severance offer should be "superior to the ESA in a meaningful way".  I'd like to parse this a little bit, because the word "meaningful" might be misleading.  In my view, provided that you've told them in no uncertain terms that they should get ILA, and that they should take the offer home and return it a different day, you've effectively immunized yourself against unconscionability, even where you're offering only token consideration, because it would become very difficult to establish the fourth element of the test, even if the deal is grossly improvident.  But I also think there's a grey area for 'grossly improvident', too.  Take Mr. Rubin, for example.  Statutorily entitled to 27.75 weeks, common law entitlement to 52 weeks.  Would a deal for 51.5 weeks have been 'grossly improvident'?  No, of course not.  What about 30 weeks?  Maybe.  What about 40 weeks?  I doubt it.  Token consideration is one thing, but if you're offering 3 months over the statutory minimum, then that isn't an insignificant amount of money.  It is not inconceivable that a person might reasonably apply a "bird in hand" analysis to it and take the deal even knowing that it doesn't fully address his entitlements.  So I'm not sure what Stringer LLP meant by "meaningful", but I think they're right if they mean it as being solely 'something more than nominal'.

That being said, consider Justice Echlin's decision in Brito v. Canac Kitchens - my commentaries here and here - in which Justice Echlin awarded "ancillary damages" because an employer offered significantly less than any good faith estimation of his reasonable notice period.  This was reversed on appeal on the basis that such damages weren't pleaded.  So it's a revolutionary concept, highly inconsistent with established case law, yet brought in by a well-respected judge in the field (who is now deceased), and if it is widely followed or endorsed by a higher court it will upturn many standard practices in employment law.  Ancillary damages are something of a sword of damocles hanging over the employment law field, to use an analogy which Justice Echlin himself enjoyed.

The bottom line is that this decision, like many others in recent years, is employee-friendly, but nonetheless should not be greatly concerning to most employers.  It won't create a problem for a dismissal which is guided by a skilled employment lawyer.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.


I mentioned earlier that I don't advise my employee clients to sign releases, even when I don't think the release is enforceable.  I consider it to be a poor practice to sign documents on the assumption that it won't be enforced.  In essence, it is making a commitment that you have absolutely no intention of honouring.  There are three particular concerns with such a thing.  Firstly, judges will not be thrilled with that kind of bad faith.  Secondly, litigation is uncertain at the best of times, and quite often when a contractual provision is unenforceable it's as a measure of protection to less sophisticated parties.  Somebody who knows the law in the area will be less sympathetic to the Court, and the Court is more likely to find a way to enforce the contract.  Thirdly, it's simply a bad commercial practice.  Getting one-up on people may seem satisfying, but it can come back to bite you.

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