In a recent case, the courts have provided essential clarification for employers when it comes to drafting severance packages in wrongful dismissal cases, particularly concerning stock options and other entitlements. In a ruling involving an employee who signed settlement documents post-termination, the Court determined that the employee was legally prevented from suing for the value of his vested stock units. This decision underscores the importance of clearly worded settlement agreements that prevent future disputes over unaddressed claims.
Case Overview: Preston v. Cervus Equipment Corporation
The case, Preston v. Cervus Equipment Corporation, 2024 ONCA 804, involved an employee who had been terminated “without cause” after four years of employment. On his termination date, the employer informed the employee that he could exercise his vested stock units in accordance with the company’s Deferred Share Plan (“Plan”). The employer also offered the employee a severance package of 15 weeks’ pay in lieu of notice.
However, in his wrongful dismissal claim filed in June 2018, the employee did not include a claim for the vested stock units. After the case settled in July 2018 for CDN $100,557, the employee, following independent legal advice, signed the settlement documents, including a Release and Indemnity. These documents were intended to fully resolve all potential claims stemming from his employment.
The Important of Properly Drafting Severance Packages
The severance package, including the Minutes of Settlement and Release and Indemnity, clearly stated that all claims, whether earned or claimed, arising from the employee’s employment or termination, were settled. It was stipulated that the settlement amount covered all entitlements, including statutory, contractual, or common law claims. Moreover, the documents expressly stated that they represented the entire agreement between the parties and superseded any prior understandings or agreements.
The Release and Indemnity included specific language wherein the employee forever waived claims against the employer, including any claims related to bonuses, stock options, share awards, or similar incentive plans. This language effectively released the employer from any further financial obligations regarding the employee’s termination, including those related to the vested stock units, which were not mentioned in the wrongful dismissal action. Specifically, the relevant details of the severance package stated as follows:
The Minutes of Settlement stated:
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- The parties agreed “to fully and finally settle all matters and entitlements (earned or claimed) arising from or relating to [the employee’s] employment (or the cessation thereof), including all matters and entitlements (earned or claimed).”
- “The entitlements set out in the Minutes of Settlement, including the Settlement Payment, were inclusive of any and all entitlements that [the employer] may owe, or which may have accrued, to [the employee] pursuant to statute, contract, common law or otherwise”. [Emphasis added]
- “…together with the attached Release and Indemnity, they constitute[d] the entire agreement between the parties.” [Emphasis added]
- “Their execution, together with the attached Release and Indemnity, cancel[ed] and supersed[ed] all previous oral or written understandings and agreements between [the employer] and [the employee] in respect of any entitlements (earned or claimed) arising from or relating to [the employee’s] employment (or the cessation thereof).”
The Release and Indemnity stated:
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- “…hereby release[d] and forever discharge[d] [NAME OF EMPLOYER]… of and from all manner of actions, causes of action, suits, debts, dues, accounts, bonds, covenants, contracts, claims and demands whatsoever which against the said Releasees [he] ever had, now have or can, shall or may hereafter have for or by reason of any cause, matter or thing whatsoever existing up to the present time”; and
- “…further declare[d] that [he] ha[d] no entitlement under or from, or any claim of any nature or kind against the Releasees in respect of, any bonus, share award, stock option, deferred share or similar incentive plan.”
However, shortly after accepting and signing the severance package, the employee contacted the employer requesting payment for his vested stock units. However, the employer argued that having signed settlement documents, the employee had waived his right to such claims. When the employee initiated a second legal action to recover the value of the stock units, both parties sought summary judgment to determine whether the settlement documents indeed barred this new claim.
Motion for Summary Judgment
Initially, the motion judge ruled in favour of the employee, awarding him CDN $75,949 for his vested stock units. The judge based this decision on the argument that the release did not apply to vested stock units, as they were not part of the original wrongful dismissal claim. Citing a previous court decision called Corner Brook (City) v. Bailey, 2021 SCC 29, the motion judge noted that a release should be narrowly construed, especially when broader terms might apply to claims not contemplated during the original agreement.
The judge believed that because the employee’s wrongful dismissal action did not address stock units, the settlement documents should not have waived any right to those vested stock units. Additionally, the judge found that it would not make sense economically for the employee to relinquish more than $75,000 in stock value in exchange for a relatively small settlement.
Court of Appeal’s Reversal of the Motion Judge’s Ruling
The Ontario Court of Appeal overturned the motion judge’s decision, ruling that the employee had indeed waived his right to pursue claims related to the vested stock units by signing the settlement documents. The Court emphasized that the employee had signed the settlement after receiving independent legal advice and that the language in the settlement documents was unequivocally clear. The Court’s decision was guided by the following critical points for employers drafting severance packages:
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Plain Meaning of the Language: The Court asserted that the words in the settlement documents should be taken at face value. The release specifically covered all claims, including stock options and similar incentive plans, regardless of whether the employee had exercised them.
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No Need for Narrow Interpretation: The Court disagreed with the motion judge’s approach of interpreting the release narrowly based on the factual circumstances. The court emphasized that the release language in this case was sufficiently broad and specific to include the vested stock units, which the employee could have exercised under the Plan but did not claim at the time of settlement.
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Factual Matrix Is Subordinate: While the motion judge considered the economic sense of the settlement, the Court reminded that settlement agreements must be interpreted according to the language used by the parties at the time of signing. Economic logic should not override the clear terms of the agreement unless there is ambiguity.
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Entire Agreement Clause: The Court underlined the importance of the “entire agreement” clause in the settlement documents. This clause made it clear that the settlement covered all matters related to the employee’s termination, further reinforcing that any claims for the vested stock units had been relinquished.
In essence, the Court ruled that the release and settlement documents were comprehensive and precluded any further claims from the employee, including the vested stock units, despite the fact that they were not explicitly mentioned in the original wrongful dismissal lawsuit.
Implications for Employers: Best Practices in Drafting Severance Packages
This ruling offers crucial lessons for employers involved in settlement negotiations or wrongful dismissal cases. It highlights the importance of having clear, well-drafted settlement agreements that explicitly cover all potential claims. To ensure that all bases are covered and that there are no lingering entitlements, employers should consider the following:
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Consult an Employment Lawyer Toronto: It is essential for employers to engage an experienced employment lawyer when drafting or reviewing settlement documents. A lawyer specializing in wrongful dismissal and severance package reviews can help ensure that the release language is precise and comprehensive.
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Include Clear Language on Entitlements: Settlement agreements should clearly specify that they cover all claims arising from the employment relationship, including but not limited to stock options, share awards, deferred compensation plans, and bonuses. Employers should also use language that explicitly releases all future claims related to these entitlements.
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Specify the Entire Agreement: Employers should ensure that settlement documents include an “entire agreement” clause, which confirms that the settlement is final and conclusive. This will prevent employees from bringing future claims based on issues that were not explicitly discussed or included in the settlement.
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Legal Advice is Essential: Employers should advise employees to seek independent legal counsel before signing any settlement agreement. This not only strengthens the enforceability of the settlement but also ensures that the employee fully understands their rights and the consequences of signing the agreement.
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Be Comprehensive Yet Specific: While it is important to include broad releases, employers should also ensure that the wording is sufficiently specific to cover the key entitlements, such as stock options, that might otherwise be overlooked.
By taking these steps, employers can reduce the risk of future disputes and secure a more effective resolution to wrongful dismissal claims.
Conclusion
The Preston v. Cervus Equipment Corporation decision provides a valuable lesson for employers drafting settlement documents in wrongful dismissal cases. The court decision stresses the importance of clarity, specificity, and the inclusion of comprehensive release language to prevent future claims. Employers who follow these guidelines, with the help of a skilled employment contract review lawyer, can better protect themselves from potential legal challenges related to termination settlements.
For many employers, termination of employment is a difficult and confusing time, especially when it comes to drafting severance packages. Therefore, in a wrongful termination of employment, it is important for employers to consult with an experienced Ontario employment lawyer for a severance package review to understand the impact of wrongful dismissal on pension plans. If you are an employer or employee needing to speak with an experienced Ontario wrongful dismissal lawyer to discuss your options and next steps on how to deal with workplace issues, call Bune Law, employment law firm in Toronto. You will review and get guidance on your severance package before you agree to sign any termination documents, and help ensure that your severance package is fair and reasonable.