Refusing to complete settlement

Evidence arising post-dismissal could allow employer to void severance agreement

Stuart Rudner

By Stuart Rudner

The vast majority of wrongful dismissal claims filed with the courts result in a settlement pursuant to which the employer agrees to pay a specified amount of pay in lieu of notice.

What happens, however, if the employer finds out about facts that might have given them just cause to dismiss the employee after the settlement has already been agreed upon?

This issue arose in the recent case of Ruder v. 1049077 Ontario Limited, a decision of the Ontario Superior Court of Justice. The facts of the case were pretty straightforward:

• the plaintiff worked as an estimator for the defendant, which operated in the glass business
• the plaintiff was dismissed for alleged poor performance
• the plaintiff sued for wrongful dismissal, seeking about $140,000
• the parties agreed to a settlement of $22,500, and minutes of settlement were executed
• some of the settlement funds were paid.

At this point, the matter took an interesting twist. The owner of the defendant company was advised by a “whistleblower" that while he was still working for the company, the plaintiff was also working for a competitor and some of its clients on the side. Not only was he doing so outside of his working hours, he was apparently doing so while he was supposed to be working for the defendant employer — and in fact using its computer equipment to do so.

As a result of this tip, the defendant employer retained a forensic analyst, who found evidence of the plaintiff's wrongdoing, as well as his attempts to delete the incriminating files. Not surprisingly, the defendant refused to pay anything further.

The plaintiff brought a motion before the court seeking an order that the defendant comply with the minutes of settlement that had been entered into by all parties. There was no issue with respect to the fact that a settlement had been reached. However, the defendant took the position that it should not be enforced in the circumstances.

The issue that arises relates to an issue that I have often speculated about: whether an employer can rely upon just cause for dismissal after a severance agreement is already been entered into. We know that after-acquired cause is a valid concept at law, and an employer can rely upon information gained after dismissal. But what about information gained after settlement?

In this case, the court did not have to assess whether there was just cause for dismissal, but whether the employer would have to comply with the agreement that had been entered into. The court referenced previous jurisprudence on the issue of when settlement agreements can be voided, and identified the following factors to be considered:

• the evidence of mistake
• the reasonableness of the agreements
• the prejudice to the party seeking to uphold the settlement if it is not enforced
• the prejudice to the party seeking to set aside the settlement if it is not if it is enforced in relation to the prejudice to the party who seeks to uphold the settlement if it is not enforced
• the effect on third parties if it is not enforced
• whether there was a real risk of injustice.

The court found the last factor was the only one of relevance, and concluded there was a real risk of injustice, as the defendant would never have entered into the agreement if it had known about the plaintiff's wrongdoing, which was not easily discoverable. In other words, this was not a situation where the employer ought to have known about the wrongdoing but failed to take reasonable steps.

The court did not have to, and did not, reach a conclusion as to whether the employee had been engaged in wrongdoing or whether there was just cause for dismissal. That will presumably be left to the trial judge, unless another settlement is reached. However, the court did order that the agreement be set aside as a result of the circumstances.

It remains an open question as to whether this type of situation could allow a court to find that just cause for dismissal existed, and that, as a result, no termination pay was required, despite the fact that there was a severance agreement entered into by the parties. That issue may be addressed by a court in this matter, if it proceeds to trial.

, in the meantime employers should take note of the fact that if evidence is discovered after the fact, which could not have reasonably been discovered before, they may be able to avoid the consequences of a severance agreement. Employers should also be aware, however, that they cannot turn a blind eye or be willfully blind to potential misconduct, and should make reasonable efforts to ascertain any such misconduct prior to entering into a settlement agreement.

Employees should also be mindful of this decision and of the potential that even a signed settlement agreement may not be enforceable if their former employer learns of misconduct that they engaged upon while employed.

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