Unfair severance deal is non-binding

For 28 years, Edward Cain worked in Ontario and Alberta with Metropolitan Life.

When Clarica bought Metropolitan, it offered him continuing employment under an agreement permitting dismissal on 30 days’ notice. He had never been subject to such an onerous term at Metropolitan.

Within two years, Clarica grew dissatisfied with Cain’s managerial skills. It provided him a stark option — take an agent job or become second-in-command at a branch office. Neither demotion was acceptable. Having been in management for most of his 30 years in the insurance business, Cain asked for a severance package.

Acceding to his request, Clarica offered seven months of salary continuance, treating him as only a two-year employee. Cain countered and ultimately settled for nine months lump sum.

But after receiving the money, he felt hard done by. Considering his 30 years of service, Cain realized he had struck a bad deal. When Clarica refused to renegotiate, Cain sued.

Clarica argued, not surprisingly, that a deal is a deal. It also relied on the earlier agreement that Cain had signed entitling him to only 30 days’ notice, much less than it paid him. But the Alberta Court of Queen’s Bench sided with Cain. The law was clear, the court ruled, that the purchasing company, Clarica, had a duty to credit Cain not only for his two years service with it, but also for his years with Metropolitan Life. Clarica violated its duty of good faith to Cain by making an initial lowball offer of only seven months.

Although it was dissatisfied with his management abilities, Clarica had no cause to dismiss him. The court said because Cain was entitled to between 20 and 24 months wrongful dismissal damages, Clarica’s first offer should have been in that range.

According to the court, Clarica was not bargaining with an equal party so had an obligation to offer him a reasonable package reflecting his combined years of service and refrain from engaging in hardball negotiations.

The employment agreement was of no assistance. Since Clarica had not drawn the restrictive 30-day termination provision to Cain’s attention, there had been no real meeting of the minds creating a binding agreement.

As well, there was an inequality of bargaining power because Cain, to keep working, had no practical alternative to accepting the offer.

Finally, Clarica had not even relied on that agreement in offering seven months initially. The termination settlement was set aside as not having fulfilled Clarica’s obligations to Cain. The court proceeded to award him 22 months of notice.

This case represents troubling unprecedented news to employers. Cain had freely initiated and negotiated a severance with his employer. He even spoke to a lawyer. Nevertheless, the court permitted him to change his mind and substituted its judgment as to what was a reasonable bargain. This case holds that an employer must make a reasonable first offer to employees or the agreement won’t stick. Whatever vestiges of free negotiations remained in employment law disappeared with this decision.

The ruling also says, if the parties enter into an employment agreement, the employer must be able to prove the employee understood the disadvantages of the contract he signed. Even obtaining independent legal advice may not be sufficient.

The best practices to prevent such an outcome include:

1. If one company acquires employees as part of a purchase, the terms of the employment offer should be set out clearly. Preferably, the purchaser should make clear the employees, if they take the job, will be credited with no past service.

2. A record should be kept of the opportunity given to employees to obtain independent legal advice before they sign an employment agreement or severance offer. Requiring them to obtain such advice is preferable.

3. In making a severance proposal, an employer must consider the employee’s previous history with predecessor companies in determining a reasonable notice period.

4. Legal counsel should be consulted in determining what is a reasonable notice period.

5. Although employers have a right to offer amounts in the lower end of the range, the offer should still be fair, particularly if no cause is being alleged. Severance offers should always exceed the statutory entitlement for severance or termination pay.

6. If an employer wishes to rely on a contract, its first offer should reflect that.

Howard A. Levitt is counsel to Lang Michener LLP. He is author of The Law of Dismissal in Canada and The Quick Reference to Employment Law, and editor-in-chief of The Dismissal and Employment Law Digest. He practises throughout Canada. He can be reached at hlevitt@langmichener.ca
If you, or someone you care about, is dealing with employment law issues in the Toronto, Ontario Region, contact Lang Michener LLP.

This article is taken from an interview with Howard A. Levitt,Employment Lawyer at Lang Michener LLP, a Toronto, Ontario Employment Law Firm. Note that laws vary from province to province. Please consult with a lawyer in your own area to be sure of the laws and specific issues in your own jurisdiction.