Key elements of constructing a release that protects employers from legal liability
Q: How can employers ensure a release signed by a terminated employee will truly eliminate all legal liability?
A: Where a severance agreement is reached and provides more than a contractual entitlement, an employer should require the terminated employee to sign a release. The goal of a release is to free the employer from any future liability or claim arising from the termination.
For a release to be legally binding, the settlement agreement, the associated release and the surrounding circumstances must meet the following requirements:
The language of the release must be drafted with particularity to the claim itself: The release must specify what is included, explicitly or implicitly, and must clearly extinguish all of the employee's potential claims. For example, to prevent a future human rights complaint, the release must specifically release the terminated employee from launching any human rights claim in the future (the 2019 Dumitrache v. Glenlyon-Norfolk School Society in B.C.). It should also reference if there is any current allegation about a human rights breach. As you cannot contract out of human rights legislation, having this kind of provision is critical to ensure an employer can defend any future complaint.
There must be adequate consideration between the parties: As in all contracts, there must be an exchange of consideration or value. In the employment context, the court may find a failure of consideration where the employer does not provide the employee with monies or benefits to which the employee was otherwise entitled.
There must be no unconscionability: The court may find that there was an inequality of bargaining power, a grossly unfair transaction, a lack of independent legal advice or a situation where one party took advantage of the other’s vulnerability. The court will consider whether the terminated employee only executed the release because of financial need (the 2005 Cain v. Clarica Life Insurance Company in Alberta).
There must be no duress: Similar to unconscionability, this analysis looks beyond the drafting of the agreement and release. Duress considers whether there were any threats of violence or other pressures against a party (but will not be established where there is regular stress or unhappiness associated with termination).
The knowledge of the party executing the release: The court will also consider whether the terminated employee understood their rights and entitlements under the Employment Standards Act or the Human Rights Code. Here, the court may also consider whether the terminated employee was considering launching a separate claim not contemplated by the release.
Evidence of lack of capacity, mistake, forgery or fraud: As with other contracts, a finding that the employee lacked capacity to execute the release or if there was mistake, forgery or fraud may also invalidate the release.
Lessons for employers
Employers should ensure that the release adequately extinguishes all potential claims that could arise from the termination. The terms should give the employee something of value from the release, over and above what is already owed based on the minimum standards set out in the statutory regime.
With respect to other considerations, the employer should ensure that the employee is provided with adequate time to consider the severance package. Rushing the employee into executing the agreement is more likely to cause issues later if they decide to pursue litigation and try to invalidate the agreement. Generally, an employer should ensure that the employee was not pressured to sign the agreement and understands the relevant rights and statutory regimes. A good way to ensure this is by confirming whether or not the employee received legal advice.
Individualizing each release will ensure it can be used as a defence in every given scenario.
This article was written with Glen Stratton, a partner at Singleton Reynolds in Vancouver.
Partner and co-chair of the Employment and Labour Group, Singleton Reynolds in Vancouver