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Making severance settlements stick

Key considerations for entering into, and enforcing settlement agreements with terminated employees


A well-drafted settlement agreement should accurately and diligently capture the fundamental aspects of the bargain. (Lucian Milasan/Adobe Stock)

Negotiating with terminated employees can be stressful and expensive. In most cases, the terminated employee will accuse the employer of breaching contractual obligations, or worse.

More often than not, organizations will lose sight of their rights and obligations, in the interest of a quick resolution.

A good settlement agreement is a legally binding contract, enforceable in court. All of the core terms of the deal must be clearly reduced to writing.

Failing to do so can leave an employer with an agreement that is barely worth the paper it is written on.

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Unlike a commercial contract between two organizations, courts automatically infer an imbalance of bargaining power between employers and employees. For that reason, any ambiguity in the settlement agreement will be resolved in favour of the employee, rather than the employer, who in most cases will have drafted the agreement.

With great power, therefore, comes great responsibility to ensure the settlement agreement is expertly drafted.

For example, many settlement agreements contain a requirement to inform the employer if and when the employee obtains new comparable employment, in which case settlement payment(s) will cease.

But what if an employee sets up their own business, or provides consulting services? Unless the settlement agreement clearly addresses these scenarios, the employer is out of luck.

The ‘release’

Once an employee has threatened or commenced litigation, the most fundamental aspect of a settlement agreement is that the employer pays a sum of money in exchange for a promise that the employee will not pursue an action in court.

That promise will typically be set out in a “release.” The rules about contractual interpretation continue to apply. A well-drafted release will act as a complete bar to any legal proceedings.

On the other hand, if a release does not cover certain claims, employers could find themselves in the unenviable situation of defending legal proceedings after having already paid an employee for what they believed was a done deal.

While the release is a critical tool in settlement, it is not always appropriate. If the agreement simply involves paying the employee what they are already entitled to under their employment agreement and/or applicable legislation, it is likely unenforceable.

It is therefore imperative that organizations seek legal advice to fully appreciate the extent and enforceability of the settlement agreement and release.

Non-competition agreements: When less is more

Post-employment obligations

The enforcement of post-employment obligations on the departing employee can form a key part of the deal for the employer.

The settlement agreement is an opportunity for the employer to clearly set out the employee’s promise not to solicit clients and/or business opportunities, particularly where those obligations are not properly laid out in the employment contract, as is generally the case.

Post-employment non-solicitation and non-competition obligations require expert drafting to be enforceable.  When drafted properly, these terms can provide immense value to an organization through protection of its proprietary interests.

Furthermore, if the settlement has arisen as a result of contentious and incendiary allegations, the settlement agreement should address the employee’s confidentiality obligations. This is critical where the allegations have the potential to harm the employer’s brand and reputation.

Consequences for breach

Not only must the terms of settlement be clear, but employers would be wise to clearly set out the consequences of breaching those terms. Otherwise, employers risk having an expensive settlement with no teeth.

Generally, any breach of the agreement should result in the employee paying back and/or ceasing to receive any of the settlement funds. Naturally, some employees will push back on this, or request that the consequences only apply to certain breaches and not others.  Ultimately, this is a business decision that should be made on the advice of counsel.

In the absence of any clear terms setting out the consequences for a breach of the settlement agreement, it is in the hands of the court. Courts have stated that it is a high bar to undo an entire agreement as a result of a breach, when the agreement itself does not achieve this objective.

Ultimately, a well-drafted settlement agreement should accurately and diligently capture the fundamental aspects of the bargain.  Getting there, however, is half the battle.

John Hyde is the managing partner at Hyde HR Law in Toronto. He advises management on all aspects of employment and labour law, including representation before administrative tribunals, collective agreement negotiation, arbitrations, wrongful dismissal defence and human rights.

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