Why Reading the Fine Print Matters in Cases of Severance Agreements
Special to The Globe and Mail
When it comes to reviewing a severance agreement, sometimes workers fail to focus on the fine print. A recent legal ruling demonstrates when this can become a costly mistake.
When Matthew Preston was hired by Cervus Equipment Corporation, he received $25,000 in stock units of the company as part of his hiring offer and additional stock units during his tenure. According to the company’s stock plan, these stocks were immediately vested once they were given to Mr. Preston, meaning that he owned the stocks and if he were later dismissed, Cervus would pay him for their value at that time.
When Mr. Preston was terminated several years later, he received a letter from Cervus informing him that his stock units, worth nearly $76,000 by that point, would be purchased from him. However, Mr. Preston disagreed with the remaining severance terms offered to him, hired a lawyer and sued the company for a better severance package.
A settlement of the lawsuit was eventually reached whereby the company agreed to give Mr. Preston just over $100,000 to settle his claim. During this time, Mr. Preston was represented by his lawyer, who negotiated the settlement and handled the related written agreement. Believing that the purchase of his stock units was not something in dispute, the issue was never made part of Mr. Preston’s lawsuit and wasn’t specifically addressed in the settlement agreement.
When workplace cases settle, companies want certainty and closure. A standard component of a settlement of any type of workplace dispute is a written document that sets out how much money the employee will receive and a release of claims that prevents him or her from pursuing more money or different terms later on.
The settlement agreement signed by Mr. Preston contained relatively standard terms confirming that the deal was final and incorporated all matters related to his termination, including those items that he claimed or hadn’t claimed as part of his lawsuit.
The problem is that the documentation didn’t specifically call out that the company still had not paid Mr. Preston for the stock units, which should have happened shortly after his termination.
Presumably, Mr. Preston and his lawyer believed that since his stock units had to be automatically purchased and were not raised within his lawsuit, the settlement agreement and release he signed did not include the nearly $76,000 that he was still owed. Otherwise, he would have sought a larger settlement incorporating this amount.
However, the Ontario Court of Appeal recently disagreed with Mr. Preston, siding with the company and dismissing his case for the value of the stock units that Cervus never paid for. According to the Court, the settlement agreement was clear and released the company from any obligation to make any further payment to Mr. Preston, including for the stock units, and was intended to be final and binding. As such, the Court refused to allow Mr. Preston’s claim.
In order for a severance agreement to be binding it has to meet a few tests.
First, the settlement must provide the employee with some form of compensation he or she was not already entitled to. Employment standards statutes provide employees with unconditional entitlements following termination. Mere compliance with those statutes cannot be used to bind a settlement. Similarly, providing an employee with the same severance amount that was already agreed to in their hiring contract cannot be used to secure a release.
Second, a settlement must not be signed in circumstances where a court will feel compelled to set it aside. There are various legal cases where courts have intervened to overturn settlement agreements signed under pressure or where it is apparent that a more knowledgeable employer took advantage of a worker’s lack of sophistication or bargaining power.
Here, Mr. Preston was represented by a lawyer throughout his case and signed the documents after specifically negotiating the terms. In these circumstances, the Court of Appeal did not feel compelled to set the release agreement aside.
The Court’s decision here should serve as a wake-up call for employees, and their lawyers, about making sure to always review the fine print, especially if the terms are unclear. To protect yourself from a similar situation, here are a few simple steps to follow:
- Identify and address any unpaid entitlements. Make sure that any issues you have regarding outstanding wages, including vacation pay, expense reimbursement or earned but unpaid bonuses or commissions are resolved as part of the settlement agreement and not left outstanding.
- Any financial or other terms that the company commits to provide as part of a settlement should always be incorporated into a clear written agreement and not left to a handshake, a separate agreement or memory.
- Make certain to clarify how any of your employment-related benefits, including items such as pension contributions or health benefits, will be addressed following your termination.
- Don’t rush the signing process. Settlement agreements are intended to be final. Ensure all terms are clear and that you know exactly what you’re giving up and what you’re receiving in return.
Daniel A. Lublin is a partner at Whitten & Lublin, representing clients in workplace legal disputes. He can be reached at [email protected].
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