WELL-DRAFTED SETTLEMENT DOCUMENTS ARE CRUCIAL WHEN SETTLING WRONGFUL DISMISSAL CLAIMS
While most employers know that achieving cost-effective early settlements of wrongful dismissal claims is often valuable, few appreciate how important expertly drafted settlement documents are for preventing crafty former employees from taking advantage of them.
In Cross v. Cooling Tower Maintenance Inc. [Cross], an Ontario employer learned the hard way that a less than expertly-drafted settlement agreement can result in a former employee facing no meaningful consequences for breaching the terms of the settlement in an effort to be paid more than they are entitled.
Background
Where a former employee claims wrongful dismissal, any legal entitlement to damages that they may have is subject to their "duty to mitigate". In the employment law context, this means that they must make "reasonable efforts to obtain comparable employment" during the reasonable notice period; and, if they are offered comparable employment, they must accept it. Where an employee fails to make reasonable efforts or turns down a comparable job, it will constitute a failure to mitigate, and this will partially or completely reduce their wrongful dismissal entitlements.
Crucially, if an employee does obtain new employment during the reasonable notice period, then the income they earn from that job will generally be considered "mitigation income" and be deducted from any wrongful dismissal damages that they would otherwise be entitled to from their former employer.
However, in most cases, wrongful dismissal claims are settled early when neither party can be sure when the employee may obtain new employment and "mitigate their damages". As a result, it is common for wrongful dismissal settlements to involve the employee receiving salary continuance (rather than a lump-sum severance amount), which will end early if the employee obtains a new job during the salary continuance period.
This type of settlement can be beneficial for employers in many cases when compared to providing an employee with a lump sum payment that is not "subject to mitigation" (i.e., where the employee gets the full amount even if they get a new job shortly after the settlement). However, a common problem is that employees often breach the terms of these settlements by failing to disclose that they have obtained new employment, in an effort to continue receiving the full salary continuance payments from their former employer while earning a salary at a new job. This is precisely what happened in Cross.
Cross v. Cooling Tower Maintenance Inc.
Mr. Cross was employed by Cooling Tower Maintenance Inc. for over 26 years before he was dismissed without cause. The company agreed to pay Mr. Cross 24 months of salary continuance based on his annual compensation of more than $200,000 per year. This was subject to mitigation, such that Mr. Cross would only receive 50% of the remaining payments if he obtained new employment during the 24-month period.
The agreement required Mr. Cross to immediately disclose any new employment to the company. Nevertheless, the company discovered in June 2024 that Mr. Cross had begun a new job in February 2024 without disclosing it.
The settlement documents were poorly drafted and were missing the appropriate language that would address Mr. Cross' failure to disclose new employment. In other words, Mr. Cross essentially had nothing to lose by failing to disclose his new employment the only consequence was that he would receive the same amount that he would have received if he complied with the disclosure requirement.
In response to Mr. Cross's months of non-disclosure, the company discontinued all salary continuance payments to him. Consequently, Mr. Cross commenced legal action against the Company for the remaining salary continuance payments. The company then filed a counterclaim, arguing that Mr. Cross had repudiated the agreement and should have to repay all amounts that he received in excess of his minimum statutory entitlements(which amounted to just under 8 months of pay).
The Court's Decision
The court ruled in Mr. Cross's favour and dismissed the company's counterclaim, ruling that Mr. Cross had not repudiated the agreement by failing to disclose his new employment as required.
In reaching this conclusion, the court held that: (i) breach of a settlement agreement will rarely constitute a repudiation; (ii) the test is whether the breaching party evinced an intention to no longer be bound by the contract; and (iii) repudiation will generally not be found unless the non-breaching party has been deprived of substantially the whole benefit of the contract.
In this case, the court found that Mr. Cross's failure to disclose his new employment was not an innocent mistake, but it nonetheless found this did not amount to repudiation. This was largely because the company was not deprived of substantially the whole benefit of the contract, in that it was still released from wrongful dismissal liability. Moreover, Mr. Cross complied with his confidentiality and non-disparagement obligations under the agreement, and the agreement did not indicate that the entire agreement would be repudiated if Mr. Cross failed to inform the company about his re-employment.
As a result, the company was ordered to pay Mr. Cross over $100,000 in additional salary continuance, with interest.
The Bottom Line
Cross illustrates why it is so important for employers to retain experienced employment counsel to ensure that any settlement agreements they enter into are expertly drafted to prevent crafty former employees from taking advantage of them.
Settlement agreements for wrongful dismissal claims consisting of salary continuance payments which are subject to mitigation should clearly state that the employee will be required to repay all settlement funds in excess of the employee's minimum statutory entitlements if they fail to disclose new employment. Otherwise, there are no real consequences to incentivize the employee to comply with the disclosure requirement, and they are instead incentivized not to disclose.
If you require assistance with negotiating or finalizing a wrongful dismissal settlement, please do not hesitate to contact us for expert advice and representation.
