Court Disregards Release where Settlement “Unconscionable”

The Ontario Superior Court recently allowed an employee to proceed with claims against his former employer regarding long-term disability insurance, even though he had signed a release in exchange for a severance package when his employment ended.

The Facts

The employee in Swampillai v. Royal & Sun Alliance Insurance Company of Canada brought an action for payment of long term disability benefits (“LTD”) and related relief against his former employer, and against the insurance company which provided administrative services in respect of the benefits.

The employee worked for the employer for several years before he became disabled from working and began received LTD. After two years, the insurance company adjudicating the claim advised the employee that he no longer qualified for benefits. The employee retained a law firm to appeal the LTD denial, and while the appeal was ongoing, his employer advised that his employment was being terminated. The employer offered him an amount of additional pay in lieu of notice above his Employment Standards Act, 2000 (“ESA”) minimum entitlements, plus a small additional lump-sum amount for loss of benefits. The employee was told that if he did not accept and sign the release, the offer would be revoked, and he would only receive his ESA minimum entitlements. The employee negotiated regarding the amount of notice he was entitled to, and eventually signed the release, which, among other things, purported to release the employer and insurance company from claims regarding his LTD benefits.

As a result, 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 Decision

The Court found that the release was unconscionable as it related to the employee’s LTD claim, and allowed the employee to proceed with his LTD claim in spite of the language of the release which precluded him from doing so. In other words, the release was legally binding in the sense that there had been an offer by the employer, acceptance of the release by the employee, and consideration provided by the employer in the form of money; however, the Court declined to enforce the benefits aspect of the release because it was too unfair to the vulnerable employee.

The Court found that, in the circumstances, the employee had proven all four elements of the test for unconscionability:

  1. a grossly unfair and improvident transaction;
  2. the victim’s lack of independent legal advice or other suitable advice;
  3. an overwhelming imbalance in bargaining power caused by victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or other similar disability; and
  4. the other party’s knowingly taking advantage of this vulnerability.

If the employee had been successful in appealing the LTD denial, he would have been potentially entitled to continue to receive benefits until the age of 65 with a value of over $300,000. The Court noted that no money was specifically allocated in the severance package for releasing the LTD claim. The employer knew the employee was in the process of appealing the denial and had been notified by the insurance company that the denial would not become final until his appeals were exhausted. Neither the employer nor the insurance company asked the employee if he intended to continue his LTD appeal or drew the employee’s attention to the fact that the release would bar him from continuing with that appeal.

In the circumstances, the Court found this to have been grossly unfair, and that it had been improvident for the employee to release his LTD claim. The Court also found that the employer knowingly took advantage of the employee by failing to alert him to the consequences for his LTD claim.

The Court further found that there was an overwhelming imbalance of bargaining power. The employee was ill and had qualified for LTD benefits for two years. He was in a financially precarious position and did not know his options. He had been told that his LTD benefits would be cut off if he did not successfully appeal before a certain date, and that his severance package would be significantly reduced if he did not sign the release in question.

Although the employee had retained a law firm to assist with his appeal of the LTD withdrawal, the employer had not raised the issue of his LTD claim with him regarding the release. As such, the Court found that it was not unreasonable that the employee failed to obtain legal advice regarding this aspect of the release.

 The Takeaway

This case is concerning, as organizations rely on settlements such as the above to provide finality for all such claims when an employment relationship ends. The Courts generally do not take it upon themselves to evaluate whether a party has struck a bad deal. However, this case illustrates that employers should be cautious when settling a claim with an employee who is particularly vulnerable.

At the minimum, employers should ensure that employees have adequate time and opportunity to seek independent legal advice before signing a release. It may seem counterintuitive to draw attention to the negative aspects of the transaction when seeking a settlement with an employee. However, this case illustrates that it may be advisable to spell out any significant consequences where the employee is particularly vulnerable. Further, where legal action has already been commenced by the employee from whom you are seeking a release, it may be advisable to make specific reference in the release to the fact that such legal action will be barred, if that is the intended effect, or to expressly waive application of the release to those claims if not.

Experienced employment counsel can assist in drafting language to help employers achieve the finality such releases are meant to provide, and can advise on best practices for dealing with potentially vulnerable employees.

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