When is a Release Not Enforceable?

Topic: When is a Release not Enforceable?

Column: “Employment Issues” - Legal Matters Issue 880

Written By: R. Yeager

August 19, 2006

Anyone who has recently faced dismissal from employment has probably been confronted by a document commonly known as a Release. At dismissal the employer presents the Release document to the employee for signature. The Release promises payment of some sum of money in exchange for signature.

Once the employee signs the Release and gives it to the employer, and the employer then pays the promised sum to the employee, a binding set of circumstances come into existence to limit or eliminate the right of the employee to make further claims for the events covered by the wording of the Release. The wording of a thorough Release will extinguish all claims of any type arising from the employment. Where a Release has been properly put in place between the employer and employee at the point of dismissal, the law considers the Release to supplant the employment contract. Aside from certain obligations contained in the employment contract which may continue beyond termination, such as confidentiality or fiduciary or even non-competition duties, the effective agreement between the parties becomes the Release.

A Non-Written Release Is Still Enforceable

In fact, even where there is no signed Release, but there is a clear course of negotiation between employer and employee that leads to a verbal agreement for settlement of the termination issues, where such agreement is not unconscionable, it will be enforced by the courts, regardless of whether there is a signed Release or not. The court will be of the view that the agreement to settle has been formed, and the court will enforce the bargain. The lesson from this is that unless the employee is fully aware of his or her legal rights upon dismissal from employment and is capable of bargaining effectively based on those rights, it is very dangerous for the employee to have settlement discussions with the employer related to a pending dismissal. An additional worry for the self-help employee is that where the employee is aware of his or her rights upon dismissal, and bargains with the employer resulting in a poor bargain for the employee, the courts will uphold the bargain. The courts will allow the employee that knows his or her rights, to make a bad bargain.

But a signed Release given to the employer, even one where the payment is made to the employee, is not always binding and enforceable. The courts will not always limit the rights of the employee to those set out in the Release.

Circumstances Around Negotiation

All the circumstances surrounding the negotiation, formation and execution of the Release should be reviewed. However, the classic circumstances where the courts will set aside or void a Release or settlement agreement relate to what is known as inequality of bargaining power. Where there is a significant inequality of bargaining power between the employer and employee, and the employer has used its position of power in an unconscionable manner to achieve a material advantage over the employee, and the settlement or bargain arrived at gives the employer a grossly unfair advantage over the employee such as to offend public morality, the bargain is an unconscionable bargain, and the courts have power to set the Release or settlement agreement aside or void it.

The following circumstances of the employee have been held to create an inequality of bargaining power. Where the employee is not of sound mind, or is somehow incapacitated, or lacks education, or is inexperienced in business, or is in desperate financial circumstances, or had no independent legal advice, or a combination of these factors, there may be an inequality of bargaining power that would give rise to an unconscionable bargain.

The employer has the chequebook, and it has the employee file and industry contacts and other advantages over the employee. An employer can use its position of power at dismissal by withholding final pay or severance pay or both, or threatening to do something to the employee such as convert the dismissal to one with cause, or threatening the reputation of the employee, or threatening to withhold references, unless the employee signs the Release. These would most likely constitute an unconscionable use of the employer’s power.

The actual bargain must be so one-sided that the courts cannot countenance it. Certainly, where the severance given is less than the minimum severance required under the Employment Standards Act, the bargain will be voided. In cases where the employee is owed reasonable notice of perhaps 12 months, but is given instead 8 weeks, a disparity of this sort would strongly support an unconscionable bargain.

Where the courts void the Release, the employee is free to claim his or her total entitlement at law.

In most cases, a signed Release is the end of an employee’s right to ask for more. However, Releases are not always final.

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