When an Ontario employee executes a well-drafted release of claims upon termination, there may still be a risk that a court will conclude the release is unenforceable because it is unconscionable.  Although a recent decision of the Court of Appeal of Ontario, Swampillai v. Royal & Sun Alliance Insurance Company of Canada, 2019 ONCA 201 (“Swampillai”), and the underlying decision of a motions judge¹ do not explicitly set out guiding principles for how employers can mitigate against this risk, a close reading of those decisions provides employers with important clues on how to diminish the possibility that a court will decide that a release is unenforceable due to its unconscionability. 

Background

In Swampillai, the Court of Appeal allowed an appeal of a motions judge’s decision that a release signed by a terminated employee, as it related to the employee’s long-term disability (LTD) claim, was unconscionable and unenforceable.  In allowing the appeal, the Court referred the issues of the release’s unconscionability and enforceability for determination at trial. 

The employee had a manual position in the mailroom for 14 years until he became disabled.  The employer funded the employee benefit plan; however claims were adjudicated, administered and paid by another entity (i.e., the policy administrator). The employee stood to receive $300,000 in LTD benefits until age 65, provided his claim succeeded and he remained medically entitled.   

There were two clauses under the terms of the LTD plan: 

• Under the “own occupation” clause, eligibility for LTD was determined on the basis of whether in the initial two-year period, the employee was capable of performing the duties of his/her current occupation with the employer; and

• After the initial two-year “own occupation” period, under the “any occupation” clause eligibility for LTD was determined on the basis of whether the employee was totally disabled from performing any work.

Key Dates & Facts

• 2013:  Employee received short-term disability as salary continuance prior to applying for LTD;
• 2013-2015:  Employee received LTD benefits under the “own occupation” clause for two years until July 2015;
• March 31, 2015:  The policy administrator advised the employee that he was not eligible for LTD benefits under the “any occupation” clause; 
• June 2, 2015: The employee was advised that his appeal of the decision was dismissed, and he had until October 22, 2015, to make a further appeal;   
• June 19, 2015: The employee retained an LTD lawyer to pursue the second appeal; 
• June 24, 2015: The employer advised the employee that his employment was being terminated effective July 22, 2015, and provided him with a severance offer and a release of all claims (Release), including LTD benefits;
• July 14, 2015: The employee accepted the severance offer and signed the Release (which he testified he did not closely read) after:
  
  • Approaching his LTD lawyer for advice on the settlement;
  • Being advised by his LTD lawyer that they did not practice employment law and he could seek advice elsewhere regarding severance;   
  • Not seeking employment law advice; and
  • Negotiating on his own with the employer, which resulted in improved severance terms.
• Post-July 14, 2015:
  
  • The employee continued appealing his LTD claim;
  • The policy administrator did not object to the employee pursuing the appeal;
  • The appeal was unsuccessful;
  • The employee commenced an action for LTD benefits against the employer and policy administrator who brought a motion for summary judgment dismissing the action based on the Release. 

Decision of the Motions Judge

The motions judge decided that the release of liability for the LTD benefits was unconscionable based on the following required criteria as set out in Titus v. Williams F. Cooke Enterprises Inc., 2007 ONCA 573, [2007] O.J. No. 3148:

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.

The motions judge found that this criteria was satisfied for the following reasons:

A grossly unfair and improvident transaction

• The employee’s settlement of his LTD claim was on terms that did not provide for payment of anything in exchange for the release of his claim; and
• The employer and the policy administrator were aware of the LTD appeal.

The victim’s lack of independent legal advice or other suitable advice

• The employee did not receive legal or other professional advice with respect to the Release and, specifically, he did not receive such advice in relation to the effect of the proposed settlement terms, including the Release on his LTD claim;
• The employer knew that the employee was appealing the LTD denial and did not mention this issue in the course of negotiations regarding the settlement of the employee’s severance; and
• Given the employee’s state of mind in the circumstances, it was not unreasonable that he did not obtain legal advice.

An overwhelming imbalance in bargaining power

• The employee was vulnerable at the time his relationship with his employer ruptured;
• The employee did not know his position and his options regarding his LTD claim;
• The employee was in a vulnerable financial position;
• The employee was suffering from health impairments that were sufficiently severe that he had qualified for LTD for two years;
• The employer knew that the employee had not qualified for LTD benefits and was appealing;
• The employee had been told that his LTD appeal was denied, and that this decision would be considered final on October 22, 2015, unless successfully appealed before that date; and
• The employee’s financial circumstances were made even more precarious because he was told that the severance package would be reduced if not accepted as presented. 

The other party knowingly taking advantage of this vulnerability

By failing to alert the employee, either directly or through its policy administrator, that the employee was required to abandon his claim for LTD benefits as part of the severance, the employer knowingly took advantage of the employee’s vulnerability.

For these reasons, the motions judge set aside the Release as it related to the employee’s LTD claim, declared it unenforceable, and required the employer and policy administrator to pay the employee’s costs.    

Decision of the Court of Appeal of Ontario

The Court of Appeal decided that the motions judge erred in finding unconscionability because, for the following reasons, there was insufficient information before him to allow him to determine that the severance transaction that included the Release was “grossly unfair and improvident”:   

• The record did not contain information about the appeal proceedings and its merits; and

• The motions judge did not consider whether the employee’s failure to closely read the Release impacted the analysis. 

The court concluded that whether the Release was unconscionable and therefore unenforceable was a genuine issue requiring trial.  It allowed the appeal and the issues of the unconscionability and enforceability of the Release were referred for determination at trial. 

What is the Bottom Line for Employers?

In light of Swampillai, an employer reduces the risk that a release may be found to be unconscionable and unenforceable by taking the following actions:

1. If the employee has made a claim or is appealing the denial of a claim and its value is low, consider making a payment to the employee that is equivalent to or close to the claim’s value in exchange for the release;

2. Notify the employee in writing that the release requires all claims to be abandoned, including any claims under appeal, and require the employee to execute an acknowledgement of this notification; and

3. Notify the employee in writing that he or she is required to obtain independent legal advice before executing the settlement offer and release, consider paying for this legal advice, and require the employee’s lawyer to execute an acknowledgement that such legal advice was provided.   

Although many employees might be considered vulnerable upon termination of employment, it is particularly crucial for employers to follow these guidelines when terminated employees are especially vulnerable because their financial situation is precarious, their health is severely impaired, or because they are unsophisticated and lack an understanding of their options regarding possible claims or the implications of executing the release.