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Cuba v. Global Egg Corp: When Should a Release Signed by an Employee Bar a Legal Proceeding Against an Employer?

This post asks you HR managers and employment lawyers a question:  If an employment contract requires an employer to give an employee “reasonable notice” of termination, is offering the employee slightly more than minimum employment standards notice in a release proper “new consideration”?

Employers usually require employees to sign a “release” in exchange for receiving payments arising from their termination.  The release will usually say that the employee agrees not to bring any other further legal proceedings arising out of the employment in exchange for some amount of money.  The legal question that sometimes arises is whether those releases should be enforced to prevent an employee who later learns she had a legal option to recover greater entitlements.

When is a Release Not Enforceable?

Courts usually enforce these releases, but not always.  There are a number of reasons why a release might not be enforced.  An obvious one is that the release provides for payments to the employee that are lower than required by employment standards legislation.  Since you cannot contract out of employment standards, such a release would be unenforceable.

Sometimes courts have refused to enforce releases that they think are “unconscionable“.  An example is Stephensen v. Hilti (Canada) Ltd., where a Nova Scotia judge refused to enforce a release signed by a 61 year old employee providing him with 3.5 months’ notice.  The Court ruled that the employee felt he had no option but to sign because he needed the money to pay his rent.  The Court struck down the release and ordered 11 months’ notice, and stated that the test of an unconscionable release was this:

(1) That there is an inequality of bargaining position arising out of ignorance, need or distress of the weaker party;

(2) The stronger party has unconscientiously used a position of power to achieve an advantage; and

(3) The agreement reached is substantially unfair to the weaker party or it is sufficiently divergent from community standards of commercial morality that it should be set aside.

Finally, another problem some employers run into is that they fail to recognize the basic rules of contract law.  As any first year law student knows, a contract requires an Offer, an Acceptance, and Mutual Consideration.   Mutual Consideration means that both sides receive a benefit.  A release is like an amendment to the existing employment contract, which means both the employer and the employee must receive a new benefit for the release to be legally enforceable.  The employer is getting an agreement that no further legal proceedings will be brought.  What new benefit is the employee getting?

I have seen releases that provide the employee with only the minimum amount of notice, severance pay, and vacation pay required by employment standards legislation.  A promise to pay an employee what they are already legally entitled to is not new consideration.  Therefore,  a release that offers the employee only their existing legal entitlements should  not be enforceable.  That interpretation is consistent with the many employment cases finding that an amendment to an employment contract is unenforceable unless the employee receives new consideration (e.g. Francis v. CIBC and Rejdak v. Fight Network).

In a Ontario Human Rights Tribunal case released last week, a release was upheld as a bar to a complaint by a group of Latin American employees who had been dismissed.  The case is called  Aidees Cuba v. Global Egg Corp..    The release letter set out the employees’ entitlements under the ESA, and then included this paragraph:

We are indeed mindful of the disruption that any cessation of employment may cause and would like to assist you in making a smooth transition.  Accordingly, on a gratuitous basis, and conditional upon your signing and returning the duplicate copy of this letter … by no later than November 21, 2008, the Company is prepared to provide you with a lump sum payment representing an additional two (2) weeks base pay.

The letter is structured to account for the need to give new consideration, which takes the form of 2 weeks’ pay above what is required by the ESA.  The theory is that since the employees are only entitled to statutory notice, offering them slightly more than that amounts to new consideration.  The Tribunal accepts that theory.  The employees argued that since English was not their first language, they did not understand what they were signing.  The Tribunal rejected that argument, noting that the employer had a Spanish speaking manager translate the letter, and it recommended that they get legal advice, which the employees did, through the Centre for Spanish Speaking People.  So the release was found to bar the human rights complaint.

Do you think that the Tribunal is correct in finding that an offer to pay slightly more than the ESA minimum amounts to new consideration to the employee?

Finding that “new consideration” exists in a promise to pay slightly more than the minimum amount of notice in the ESA is not without controversy.  That’s because the ESA minimum notice is probably less, sometimes considerably less, than the notice of termination required by the employment contract.  In the Global Egg case, the Tribunal does not tell us whether the employment contracts of the employees set out how much notice was required, although I’d think this is clearly relevant.  If the contracts included a clause saying that the employer need only give ESA minimum notice, then I think the decision is correct.  In that case, the employer has in fact offered the employees new consideration in the form of a benefit to which they were not contractually entitled.

However, let’s assume that the contracts are silent on how much notice is required, as is very often the case.  If so, then the company is contractually required to give common law “reasonable notice”, which will be more than the ESA minimum notice is almost all cases.

Consider an employee with 8 years’ service.  That employee is entitled to 8 weeks’ notice under the ESA, but perhaps up to as much as 8 months’ notice under the employment contract (the court decides what’s “reasonable notice”, but 8 months is not unrealistic for a 8 year employee).  If the release in that case offers the employee only 10 weeks’ pay in exchange for an agreement by the employee not to sue for wrongful dismissal, then has the employer provided new consideration?

The answer is only ‘yes’ if we completely ignore the fact that contract requires the employer to give the employee considerably more than 10 weeks’ notice.

So I ask again, if an employee is entitled to 6-8 months contractual notice, how is an offer to give that employee 10 weeks’ notice “new consideration”?

What do you think?

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9 Responses to Cuba v. Global Egg Corp: When Should a Release Signed by an Employee Bar a Legal Proceeding Against an Employer?

  1. Machado Reply

    June 13, 2011 at 3:26 pm

    In terms of amount of weeks, then 10 weeks should not be considered new consideration compared to an employee who is entitled to 6-8 months. However, would it be considered a new consideration, if an employee signs a release and the company opts to pay out 10 weeks in a lump sum payment or additional weeks over a longer period (Based on the employees choice). This option would be left to the employee on whether, they have sufficient means of gaining full time employment again fairly quickly or not. If an employee has another job fairly quickly and mitigates their damages fairly early on, then going to court for the additional extra weeks, may be deducted from their award.

  2. Mike Reply

    June 14, 2011 at 11:52 am

    “That employee is entitled to 8 weeks’ notice under the ESA, but perhaps up to as much as 8 months’ notice under the employment contract”

    In this case, the new consideration isn’t just the money. The employee is trading an uncertain larger sum in the future for a certain one today. If settling for less than you might be entitled to at the end of litigation is unenforceable, then most settlement agreements (not just employment law) are flawed.

    • Doorey Reply

      June 14, 2011 at 3:03 pm

      Thanks Mike. I’d just say that, while the precise amount of the notice required by the contract is uncertain, everyone agrees that an 8 year employee is entitled to considerably more than 10 weeks notice if the usual Bardal factors are applied. Also, I wonder whether it is correct to think about a release as a “settlement” as opposed to a contract amendment. There is no lawsuit or even imminent lawsuit at the time the release is entered into, so what are the parties “settling”. I think a release is better understood as a contract amendment in which the employee is offered some benefit in exchange for not exercising the contractual right to sue for reasonable notice (or the statutory right to claim other entitlements). The question is what consideration flows to the employee in that amendment. My point is that consideration can’t be found in a promise to pay way less than what the employee is already entitled to under the contract.

      I agree though that the trade off is get less money today to avoid the hassle, delay, and cost of a lawsuit to recover your contractual entitlement. This dynamic preferences the employer to a significant degree, since most employees can’t afford litigation and need the cash immediately. It makes the contactual requirement to provide “reasonable notice” largely meaningless to most workers. It’s a flawed legal model that allows one party to avoid its contractual obligations almost always by simply refusing to comply, daring the other side to sue, and then offering a small fraction of the contractual amount knowing the other side hasn’t the means to litigate. That is our employment law model. This is one reason why some academics/policy folks argue for an abolishment of the common law “reasonable notice” model and a move to higher ESA minimum notice periods.

  3. Daniel A. Lublin Reply

    June 14, 2011 at 11:10 pm

    Hey David, you pose a really good question. I think the courts and tribunals should do whatever they can to ensure employees are treated fairly upon their dismissals. In my view, the principle of freedom of contract should not always prevail over fundamental employee rights, especially where there is a disparity of bargaining positions.

    To answer your question, I think most judges would say that a release that provides for more than the statutory minimum is fair although it probably should not be if the employee was entitled to reasonable notice based on his or her contract.

    In Brito v. Canac, Justice Randall Echlin came down hard on an employer for providing the employee with only the “bare minimum notice” under the ESA despite knowing the employee was entitled to much more. Again, while it’s not technically illegal to provide the ESA notice only, it is still a breach of contract. If this decision picks up any steam with other courts, there may be more of a basis to contest releases that rely only on the ESA amount as the bare minimum.

    My national column from last week addresses the issue of only providing the bare minimum notice. http://www.metronews.ca/toronto/comment/article/875041–the-minimum-is-not-enough

    Daniel

    • Doorey Reply

      June 15, 2011 at 10:34 am

      Thanks Daniel, I had not seen that case. I enjoy your column. David

  4. Machado Reply

    June 15, 2011 at 11:03 am

    This topic brings up the importance that the role human resources plays in employer contracts. Human Resources teams maybe deciding on notice terms for employees on behalf of their employer. In some cases, HR members, may not know what to provide a long service employee and there for pays legal minimums. In some cases, they want to pay more, but are directed by senior management to cut costs. Human Resources may play a balancing role between supporting management objectives and looking after the welfare of long standing employees.

    In organizations I have worked for in the past, paying more in notice terms was fairly inconsistent but agreed that it would keep legal suits from the company door. Human Resources sometimes had an internal struggle deciding who was getting how much. Especially when termination managers want to wash their hands of certain employees.

  5. Anne Muter Reply

    June 15, 2011 at 2:08 pm

    This posts raises excellent questions about the enforceability of releases. In my opinion, if there is no termination provision in writing and an employee is therefore entitled to reasonable notice at common law, anything near or below that amount is not stricktly fresh consideration. However, I doubt the courts will ever approach the issue this way as it would make all settlement releases that provide perhaps less than the total legal entitlement but avoid litigation suspect. The easier way for a court to set aside a release they do not want to uphold is by finding it unconscionabe. I think that the court is indirectly evaluating the sufficiency of the consideration when they set aside an unconscionable release, even though that would never be said. However the analysis is done, I think that employer’s need to be carefull that they are providing a reasonable amount so it does not appear so unfair as to be set aside.

  6. Mikael Swayze Reply

    June 16, 2011 at 9:45 am

    David…I agree that the current employment law model is deeply flawed and primarily benefits employers and deep-pocketed senior employees (like managers). However, an alternative to abolishing common-law damages and increasing statutory minima, might be to empower a statutory tribunal (like the OLRB for instance) to adjudicate these kind of disputes on a more expeditious basis (and without the legal costs) than courts.

  7. Dennis Buchanan Reply

    June 20, 2011 at 11:45 pm

    I think Daniel Lublin’s reference to the Brito et al case is very appropriate; I was quite surprised in that case at the award of what appears to be punitive damages, where the only articulated misconduct appeared to be paying ‘only’ the ESA minimums notwithstanding that it was essentially conceded that the reasonable notice period was considerably longer.

    If that criticism holds up in the jurisprudence (and, if the judge were anyone else, I would doubt that prospect), then it would essentially amount to an obligation on employers to pay out a reasonable (if perhaps low-end) estimate of the reasonable notice period up front *then* negotiate any outstanding entitlements.

    The challenge with that approach, however, is the same trouble with the prospect of ignoring releases where there is less paid than would constitute reasonable notice: It would undermine post-termination releases entirely. Yes, I’m resorting to the ‘slippery slope’ argument, and I recognize that in Global Egg we’re talking about something a little closer to a ‘clearest case’ situation. But when the language we use for common law notice is “reasonable notice”, it’s very difficult to distinguish between the clearest case and less clear cases, because anything short of “reasonable notice” is, by definition, unreasonable. So if I sign a release and am paid 12 months’ notice, and I can convince a judge that the reasonable notice period is 13 months, then by your logic there is still no fresh consideration, and therefore the release should be set aside for lack of consideration, and my employer acted unreasonably in only paying me 12 months’ wages. From a public policy perspective, I think that we can all agree that this is not a desireable result, and I would argue that the unconscionability analysis is a far better way to avoid such a slippery slope.

    (The Brito slippery slope argument might be averted by a bona fides component…yet that doesn’t solve the ‘fresh consideration’ slippery slope problem.)

    Besides, the “fresh consideration” notion, while based in the first principles of contract law, is much more strictly applied in the context of ongoing employment contracts than in any other contractual scenario. If I send somebody a bill for $1000, which I am justly owed, but my client complains and says he won’t pay unless I reduce the bill to $750, and I concede to get the cheque before initiating my suit for the balance, my chances of not being estopped are slim-to-none, though there’s no more consideration here than the employee receives when signing a release for less than reasonable notice.

    Ultimately, I don’t think I agree with your suggestion that there is a distinction to be drawn between post-termination ‘contractual amendments’ and formal pre-litigation settlements: From the employee’s perspective, it is essentially the same question of how big the cheque is going to be.

    (As a side note, many/most releases have, on some level, integrated some sort of ‘reference letter’ provision, which in most cases would exceed any pre-existing contractual *obligation* and thereby defeat the ‘fresh consideration’ argument.)

    As for the potential abolition of common law notice in favour of higher ESA notice…if there’s one thing I think our model absolutely has right, it’s that length of service should not be determinative. I would far prefer to see a move toward awarding punitive damages in response to employer hardball tactics (I don’t think I’m completely off base in thinking that an employer’s good faith duties are comparable to insurers’ good faith obligations), and either a mechanism for larger-scale cost recovery (especially at Small Claims), or alternatively I would agree with Mikael Swayze that a specialized administrative process for low-value cases might be appropriate. I’ve long thought that the Small Claims Court is ill-suited to wrongful dismissal cases, due to the lack of specialization. (Imagine a self-rep employee versus a paralegal-represented employer, before a Deputy Judge who practices family law. It is quite conceivable that none of the three would even have heard of Bardal.)

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