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Downsizing a company’s workforce is a tough process and can also be quite expensive, both as a result of severance payments and wrongful dismissal lawsuits. One option for reducing or eliminating litigation costs is to make the payment of severance conditional on signing a release. Many believe that if an employee signs a release, an employer can rely on it to stop any legal proceedings. However, a release can be set aside if a court determines that it is “unconscionable”.

Rubin v. Home Depot Canada Inc., 2012 ONSC 3053
In Rubin, the Court considered a release that Mr. Rubin, a 63 year old employee who had 20 years’ service, signed when Home Depot terminated his employment. In Mr. Rubin’s termination letter, Home Depot offered him 28 weeks’ severance (only 2 days more than his minimum ESA entitlements). Home Depot indicated that this severance would only be paid if Mr. Rubin signed a release with a one week period. Although it was written in the termination letter, Home Depot did not tell Mr. Rubin that he could take a week to seek legal advice before signing this release. Mr. Rubin signed the release at the initial meeting. He later sued Home Depot on the grounds that the release was unconscionable and should be set aside.

The Court agreed with Mr. Rubin. The Court stated that four elements must be met to set aside a contract for being “unconscionable”:

  1. A grossly unfair and improvident transaction;
  2. Victim’s lack of independent legal advice or other suitable advice;
  3. Overwhelming imbalance in bargaining power caused by the victim’s ignorance of business, illiteracy, ignorance of the language of the bargain, blindness, deafness, illness, senility, or other disability; and
  4. Other party knowingly taking advantage of this vulnerability.

The Court concluded that it was grossly inadequate for Home Depot to offer only 28 weeks’ severance to Mr. Rubin. They also noted that Mr. Rubin did not have independent legal advice. While the termination letter stated that he had one week to sign the release, this was not sufficient because Home Depot did not tell Mr. Rubin that he was able to seek legal advice before signing.

Finally, the Court found that Home Depot had taken advantage of Mr. Rubin. The Court found that Home Depot had misled Mr. Rubin into believing that the severance offered was his maximum entitlement. First, the letter told Mr. Rubin that 28 weeks’ severance exceeded his entitlements under the Employment Standards Act, 2000 (“ESA”) (it did, but only by two days’ pay). Since the letter did not refer to Mr. Rubin’s common law entitlements to reasonable notice, it gave Mr. Rubin the incorrect impression that he was receiving more than what he was entitled to. Second, the letter suggested that he would not be paid the severance if he did not sign the release. This was false because the ESA required Home Depot to pay almost the entire amount to Mr. Rubin irrespective of whether he signed the release. The Court, therefore, set aside the release and awarded 12 months’ salary to Mr. Rubin.  

In light of the Rubin case, employers should avoid overselling severance packages. Instead, employers should ensure the termination letter clearly sets out the employee’s minimum statutory severance entitlements, and then confirms what amount the employer is prepared to pay above those minimum entitlements in exchange for a release. In addition, employers should insist that employees take some time to review the package before signing it to allow them time to obtain any legal advice they need.