When an employee is terminated and offered a severance package, they are almost always asked to sign a release agreement in exchange. A release agreement, as the name suggests, releases the employer from liabilities for employment-related claims. Thus, after an employee has signed a release agreement, if they attempt to sue their employer later on, the release agreement is typically raised as a bar for the employee to proceed with litigation.
There are certain circumstances in which a court will not enforce a release. The Ontario Superior Court of Justice recently allowed an employee to proceed with claims against his former employer regarding long-term disability (“LTD”) insurance, even though he had signed a release in exchange for the severance package when his employment ended.
In Swampillai v Royal & Sun Alliance Insurance Company of Canada, Mr. Swampillai worked for the employer for several years before he became disabled from working and began receiving LTD benefits. After two years, the insurance company advised he was no longer qualified for benefits. Mr. Swampillai retained a law firm to appeal the LTD denial, and while that appeal was ongoing, the employer advised him that his employment was being terminated. His employer offered him an amount that exceeded his minimum entitlements under the Employment Standards Act, 2000 (“the ESA”) for pay in lieu of notice, and an additional lump sum amount for loss of benefits. Mr. Swampillai was told that if he did not accept the offer and sign the release, the offer would be revoked and he would only receive his ESA entitlements. After some negotiation regarding the amount for pay in lieu of notice, Mr. Swampillai signed the release, which purported to release the employer and insurance company from claims regarding his LTD benefits.
As a result, both the employer and the insurance company brought a motion for summary judgment asserting that the employee was not entitled to make any claim against the employer for disability benefits, or against the insurance company for the administration of those benefits.
The court found that the release was unconscionable as it related to Mr. Swampillai’s LTD claim, and that Mr. Swampillai was allowed to proceed with the LTD claim despite the language in the release that precluded him from doing so. In other words, although the court found the release was legally binding with respect to the pay in lieu of notice, the court declined to enforce the benefits aspect of the release because it was too unfair to Mr. Swampillai, a vulnerable employee.
The test for unconscionability has four elements:
- A grossly unfair and improvident transaction;
- The victim’s lack of independent legal advice or other suitable advice;
- 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 other similar disability; and
- The other party’s knowingly taking advantage of this vulnerability.
The court noted that there had not been money specifically allocated towards releasing the LTD claim, that the employer knew Mr. Swampillai was in the process of appealing the denial, and neither the employer nor the insurance company drew Mr. Swampillai’s attention to the fact that the release would bar him continuing in that process.
Lessons to be Learned
Although this story had a happy ending for Mr. Swampillai, it is important to highlight that generally speaking, courts do not take it upon themselves to intervene when people have been handed a raw deal. Therefore, when presented with a release, it is always recommended that you speak to a lawyer so you understand the true nature of the deal you have struck.
However, as this case illustrates, there may be instances where a court does intervene, particularly when dealing with a vulnerable employee.
If you have received a release and want to review it with a lawyer, or if you have cold feet after signing a release and want to know if there is any way around it, you can contact an employment lawyer at MacLeod Law Firm at [email protected] or 647-204-8107.
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