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?
