Why courts will say no to unfair termination contracts

Date: July 5, 2012
Author: Daniel A. Lublin
Publication: The Globe & Mail
What happens if a just-dismissed employee is misled into signing a release that prevents him from taking further legal action? Will it matter if the employer took advantage of that employee’s vulnerability by steering him towards signing the document without pointing out that he had other choices? According to a recent Ontario case, employers have a duty to treat their employees fairly at the time of termination. Otherwise, even a signed document can be set aside.
Sixty-three-year-old Eric Rubin had worked for Home Depot Canada Inc. for nearly 20 years when he was called to what he thought was a normal business meeting. However, a few minutes later, he was suddenly fired in what Home Depot described as a restructuring. Mr. Rubin was told it was his last day at the company and given a letter confirming his dismissal and encouraging him to sign a release.
A release is an important legal document that, once signed by an employee, confirms that he or she is accepting the terms of the termination and will not pursue further legal action. However, in order for a release to be enforceable, it must meet a few tests.
First, the release must provide the employee with some form of compensation he or she was not already entitled to, and second, it must not be signed under circumstances in which a court will feel compelled to set it aside.
In this case, Mr. Rubin was “offered” 28 weeks’ pay as compensation for signing the release. The letter he received advised him that this payment was in excess of what Home Depot had to provide him, leading Mr. Rubin to believe he was receiving something special for signing. However, given his tenure, the legislation already required Home Depot to give Rubin a severance payment of 27 and three-quarter weeks, which meant that its “offer” to him actually consisted of an additional two days’ pay.
Here, Mr. Rubin made a common error. Even though he was given extra time to consider Home Depot’s offer, he was unaware of what he was actually entitled to, and he therefore signed the documents on the spot, believing that Home Depot’s offer to him was fair. However, soon after, Mr. Rubin realized that he had made a mistake.
As an employee in Canada, he was entitled to a fair severance package, which is often worth several times more than what is found in the legislation. Mr. Rubin took the documents to a lawyer and promptly sued Home Depot, arguing that the release should be overturned and Mr. Rubin given a proper severance package.
At a recent court hearing, the judge came down hard on Home Depot for taking advantage of an older and long-term employee. The payment Home Depot “offered” to Mr. Rubin was so close to what he was already entitled to that he received very little value for signing the release. Further, the court considered Mr. Rubin a “victim” of a more knowledgeable employer, who “misled” him into believing that if he did not sign the release, he would not be paid any severance, which was simply not true.
In this case, Home Depot engaged in a widespread tactic of “presumptive selling,” which Canadian companies should reconsider in light of the judge’s findings. The severance package was presented in such a way as to encourage Mr. Rubin to simply sign it, instead of giving him a fair opportunity to assess his legal rights. The court concluded that Mr. Rubin was taken advantage of and struck down the release, awarding him double the amount of severance – an amount more in line with what is considered fair – than he was initially offered, plus his legal costs.
The language of the judge’s decision serves as cautionary advice to employers about how not to terminate their employees. However, there is another lesson to be learned from this case, which is that employees themselves need to be responsible for what they do and sign. I offer the following advice to any Canadian employee faced with an offer of severance and a release:

  • Employers do not assess their severance obligations based on what is considered fair. They make offers of severance based on what employees are likely to agree to, since most people are unaware that they can negotiate or sue for more. For this reason, most severance packages are negotiable, so ensure that you are receiving a fair offer before agreeing to its terms.
  • Tell your employer you need more time to meet with a lawyer or financial adviser to ensure you fully understand the terms of the severance package. Very few companies will refuse to provide a few extra days to consider an offer, aware that denying this request could be cause to challenge any agreement.
  • Try to understand the interplay between what the legislation requires an employer to provide in terms of severance and what it is actually providing. Many severance packages offer employees little more than the statutory minimum, which will almost never be fair.