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The effect of signing a severance package

severance package

Question: Can employees get out of signed severance packages?

Answer: It is trite law that an employee’s acceptance of a severance package; coupled with the signing of a final release is essentially a bar to that employee advancing a future claim for wrongful dismissal. Nevertheless, in a recent appeal from the Ontario Small Court at the Ontario Divisional Court, one unrepresented gentleman claimed wrongful dismissal, unpaid bonus and vacation pay over the notice period despite his acceptance of a severance package and signing of a final release.

In Zhang v. Dell Canada, 2020 ONSC 48 (CanLII), the Appellant was provided with a termination letter, an acknowledgement and a final release. It was not disputed that the termination letter outlined the severance package which was being offered to the Appellant and that the Appellant was requested to return the signed documents within two weeks. It was not disputed five days after receiving the documents, the Appellant accepted the severance offer and signed the acknowledgement for the termination letter, signed the final release and returned both documents to the Respondent.

Nevertheless, about eighteen months later, the Appellant sued the Respondent employer at the Small Claims Court. The Plaintiff sought the following relief:

  1. A declaration that the Plaintiff was wrongfully dismissed by the Defendant; and
  2. Damages as a result of the wrongful dismissal and breach of contract for an unpaid incentive award, unpaid annual bonus for the notice period in the amount and unpaid vacation pay for the notice period.

In the result, the Small Claims Court Judge dismissed the Appellant’s claim, finding among other things, that the full and final release signed by the Appellant was a full answer to his claim.

Undeterred, the Appellant appealed the Small Claims Court decision to the Divisional Court. However, to little surprise to the bar, the appeal failed.

The Divisional Court found that it was not disputed that the Appellant accepted the severance offer and that he signed the acknowledgement and final release. The Divisional Court stated the following in dispensing the Appeal:

In my view, the Deputy Judge did not make an overriding and palpable error in his interpretation of the acknowledgment and final release signed by the Appellant. The Appellant had the opportunity to seek independent legal advice before he decided to accept the severance offer. The Appellant acknowledged in cross-examination that after he accepted the severance offer and executed the acknowledgement and final release, he received everything he was supposed to receive from the Respondent pursuant to the accepted terms of severance. That is, the Respondent fulfilled its obligations. The acknowledgement and final release are clear – upon the Respondent fulfilling its obligations under the terms of the severance offer, the Appellant agreed not to make any further claims which included further claims for vacation pay, bonus, and wrongful dismissal. The terms of acknowledgement and final release are a bar to the Appellant’s action.

Is it possible to get out of a signed severance package?

Employers should be cautious that there is one avenue to get out of a signed severance package. Employees can argue that if the release was unconscionable, the court should set it aside. Whether a release is unconscionable is based on the criteria for unconscionability set out in Titus v. William F. Cooke Enterprises Inc.2007 ONCA 573 (CanLII). At paragraph 38 of Titus, The Ontario Court of Appeal stated the four elements necessary for unconscionability:

  1. a grossly unfair and improvident transaction;
  2. the victim’s lack of independent legal advice or other suitable advice;
  3. 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
  4. the other party knowingly taking advantage of this vulnerability.

Thus, to ensure that a release holds up, employers should ensure to:

  1. Offer at least meet minimum standards for notice and severance plus a nominal amount of consideration;
  2. Make sure the employee is told to get legal advice;
  3. Make sure the employee understands what he is signing; and
  4. Do not try and trick or trap the employee into signing the release.

Interesting, the Appellant in Zhang v. Dell Canada, discussed above, did plead that the severance package he signed was unconscionable. However, he didn’t advance any evidence to the same effect in trial, and thus his claim was quickly dispensed with procedurally. Perhaps his one and only avenue in his wrongful dismissal action was the unconscionably argument, but he chose to dispel it.

Jeff Dutton, Dutton Employment Law

Employment Lawyer at Dutton Employment Law
Jeff is a leading employment lawyer in Toronto. He represents both individual employees and management in all matters. Prior to founding Dutton Employment Law, Jeff was a prosecutor for the Ministry of Labour. He has been successful at the Ontario Labour Relations Board, Ontario Court of Justice and the Ontario Superior Court. Jeff is a frequent lecturer on employment law matters and has been widely published in newspapers and trade journals. Read more.

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