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A Deal May Still be a Deal: Ontario Court of Appeal Overturns Summary Judgment Decision that Severance Transaction was Unconscionable while Entitlement to LTD Benefits was a Live Issue.

In the recent decision Swampillai v. Royal & Sun Alliance Insurance Company of Canada the Court of Appeal was asked to consider the issue of conscionability in circumstances where an employee signs a full and final release when the issue of entitlement to LTD benefits is still live.

Facts:  The employee in this case was employed by the insurer for 14 years in the mail room.  He became disabled and received self-funded short-term disability benefits for 2 years. Thereafter Sun Life, who provided LTD benefits, advised the employee he was not entitled to LTD benefits. The employee retained a law firm to represent him in the disability benefits dispute. During this time the employee’s employment was terminated and he was provided with a severance offer that would require him to sign a release releasing his employer from all claims including LTD benefits. The employee sought legal advice from the firm handling his disability dispute but was told they did not have expertise in this area and he should get advice from another firm. Instead, the employee further negotiated directly with his employer which led to the improvement of the severance offer.  The employee accepted the offer and signed the release, which he claims he did not read closely.   

Despite signing the release, the employee bought a litigation claim against Sun Life for LTD benefits. Sun Life brought a motion for summary judgment to have the case dismissed on the basis of the release.  

Summary Judgment Motion: At the summary judgment motion the trial judge found that the release was unconscionable based on the factors set out in the Titus decision of the ONCA and therefore unenforceable. The employee was free to pursue his litigation against Sun Life despite having executing the release document.  The decision was a blow to employers who regularly include similar language in release documents, even where the employee’s entitlement to LTD benefits is a live one.  

Ontario Court of Appeal:   The Court of Appeal unanimously set aside the trial judge’s decision. While the decision was primarily based on the more technical summary judgment process and the Appeal Court’s belief that the issue of conscionability was a genuine issue for trial, there are some helpful comments from the OCA for employers.  First, in determining whether the record was sufficient to show a “grossly unfair and improvident” severance transaction (one of the factors used to determine conscionability) the Court noted that it was not disputed that the severance amount was more than fair based on the employee’s years of service.  Second, the Court indicated that the record did not include any information about the appeal process for the LTD benefits and the chance for success in the disability litigation. There was also no evidence as to whether the enhanced severance negotiated would have adequately compensated the employee and therefore insufficient evidence against which the fairness of the severance transaction could be properly considered. Finally, the appellate court found that the trial judge had not turned his mind to the whether the employee’s failure to closely read the release should have been factored into the decision on whether the severance transaction was unconscionable. The Court of Appeal allowed the appeal and referred the issue of the enforceability of the release for determination at trial.

Takeaway for Employers:  While the decision to set aside the summary judgment was a welcome one for employers, the matter of whether the Release is enforceable must now go to trial -an expensive exercise for any employer.  It’s difficult to understand what more the employer could have done in this case, having negotiated an enhanced severance offer in return for asking the employee to sign what was likely a standard release agreement. This case speaks to the need for additional caution when negotiating a severance agreement with an employee who is disabled and where the issue of disability entitlement is still a live one.  Perhaps a clearer forfeiture of his LTD claims could have been included in the terms of the settlement itself in order to better defend against the “I didn’t realize what I was signing” argument that employees sometimes assert after accepting terms of settlement.  

The team at CCPartners can help negotiate the delicate issues that can arise when dismissing an employee who may be entitled to disability benefits.  Click HERE for a list of lawyers that can assist with any questions related to this challenging workplace issue.