Cross your "I"s and Dot Your "T"s: Mistakes During Terminations Can Be Costly
Did you catch the mix-up in the title of the blog post?
It’s easy to make a mistake when you’re not paying close attention.
Two Ontario cases decided in 2021 act as a cautionary tale for employers about the importance of paying close attention during terminations, including when drafting termination letters, calculating separation payments, and following the terminated employee’s payment directions. In each of these cases, seemingly innocent and inadvertent errors piled up, resulting in substantial financial consequences for the employers.
An overview of the two cases is below, followed by some PH Tips for Employers, to help employers avoid making costly mistakes of their very own.
1. Perretta v. Rand A Technology Corporation, 2021 ONSC 2111
In this case, the employer had in place an employment agreement that sought to limit the employee’s termination entitlements to the minimum required by the Employment Standards Act, 2000 (“ESA”), plus an additional two weeks of notice or pay in lieu. Notably, there was nothing in the contract requiring her to sign a release to get that extra two weeks’ pay.
Unfortunately, rather than pay out the employee’s full contractual termination entitlement, the employer demanded she execute a Full and Final Release in exchange for the additional two weeks’ pay. This was a mistake – she had a contractual entitlement, no release required. But the employer made its mistaken demand twice, before receiving a letter from the employee’s lawyer pointing out the error.
At that point, the employer admitted its mistake and apologized. The employer then paid out the additional two weeks’ pay, but the damage was done.
The Court held that the employer’s demand for a release repudiated (i.e. showed an intention not to be bound by) the employment agreement, so the employer was not entitled to rely on the termination provisions. Interestingly, the Court based its finding of repudiation in part on specific terms in the settlement documentation that are fairly common – i.e. a requirement to keep the settlement confidential; no admission of liability; return of property; and so on. The offending terms sound like they came from standard-form termination documents that were not appropriate for an employee receiving only her contractual entitlements.
Whatever the reason for the mistake, the Court held that the repudiation disentitled the employer from relying on the contractual termination provisions.[1] In addition, the Court took a negative view of the employer’s behaviour, which likely coloured its award (in this case, six months’ notice under the common law).
2. Russell v. The Brick Warehouse LP, 2021 ONSC 4822
In this case, the mistakes were seemingly inadvertent but they snowballed – avalanched, even – to the point that the Court held that the employer’s many mistakes amounted to unfair dealing warranting damages.
Here, a long-service employee was dismissed, and the employer made a “without prejudice” separation offer in a termination letter that was deficient in at least the following respects:
(i) It failed to comply with the benefit continuation requirements under the ESA;
(ii) It failed to provide for vacation pay during the ESA notice period; and
(iii) Most importantly, the termination letter did not advise Russell that if he declined the “without prejudice” offer, he would immediately receive his ESA entitlements.
The mistakes compounded further from there. Despite its position in the termination letter that benefits would end, the employer did continue Russell’s benefits but it inexplicably failed to advise Russell of that fact for more than seven months post-termination (past the time many of the benefits were expired, presumably meaning he couldn’t use them). On top of that, the company fumbled the ESA payout by repeatedly miscalculating the amount, and failing to direct it to Russell’s RRSP per his request, which resulted in a delay of over seven months before Russell received his ESA entitlements.
In awarding $25,000 in moral damages against the employer, the Court found that the employer’s mistakes amounted to a lack of fair dealing and transparency, and caused Russell mental distress.
Taken individually, the employer’s mistakes are sloppy but likely inadvertent. But taken together, the pattern of carelessness was too much for the Court to countenance and it ended up costing the employer.
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So what lessons can be learned from these cautionary tales for employers?
PH Tips for Employers
1. Take care in drafting the termination letter.
Employers often carefully scrutinize their employment contracts to make sure any termination provisions comply with the ESA.[2]
Well, the same level of scrutiny should be put into assessing whether termination letters comply with the ESA and account for all uncontroversial statutory and contractual termination entitlements. Failing to do so could potentially amount to a repudiation that renders contractual termination provisions unenforceable, or give rise to damages.
2. Don’t over-rely on templates or standard forms.
Templates can be useful administrative tools, but over-routinization of termination procedures can be a dangerous thing. There is no “one-size-fits-all” or “fill-in-the-blanks” termination letter that’s appropriate for every circumstance.
Some of the mistakes in Perretta appear to have arisen from using termination documents that were not tailored to the situation and contained inappropriate terms. Ask:
Are there any special circumstances that should be accounted for? (e.g. leaves of absence, ongoing workplace investigations, etc.)
What are the employee’s contractual and statutory entitlements?
Is anything extra being offered in exchange for a release or any additional terms?
Think critically and carefully about what’s appropriate to include, and tailor the documents to suit the situation. Not all termination letters have to make a “without prejudice” offer – they can simply say what the employee is receiving pursuant to their statutory or contractual entitlement (as applicable).
3. Be proactive in seeking advice, and address mistakes promptly.
Mistakes happen. But what was really damaging to the employers in Perretta and Russell is that the mistakes were repeated and compounded each other, resulting in increased damages.
Ideally, if in doubt, seek any legal or tax advice upfront to help avoid mistakes. But if a mistake comes to your attention, don’t ignore it or bury it. Get professional advice promptly – it may be possible to fix the mistake with proper guidance, or at least avoid making it worse.
4. Communication counts.
Don’t leave termination entitlements to the imagination – entitlements, benefits, and other necessary information should be clearly communicated to terminated employees.
The employer’s problems in Russell arose at least in part due to poor communication about the employee’s termination entitlements, benefit continuation and the implications if the employee did not accept the offer as drafted. Because of its poor communication, the employer didn’t get credit for continuing certain of the employee’s benefits beyond the statutory period; instead, the employer got hit with damages for failing to tell him about it.
To keep lines of communication open, consider adding a term asking the employee to review the calculations carefully and offering a time to go over the letter and address any questions. Ideally, open communication like this encourages discussion rather than legal disputes, in the event of a disagreement over the math.
5. Consider offering some “freebies.”
Consider providing certain unconditional “freebies” – with no release required. For example:
Ongoing participation in the Employee Assistance Plan (EAP);
Employment letters or references; and/or
Outplacement counselling.
Providing these benefits can help employers and employees by facilitating re-employment and lessening the negative impacts of the termination. It can also help demonstrate good faith on the employer’s part.
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Terminations can be tough – but mistakes make them tougher on employers and employees alike. This blog focused on the financial costs, but there can also be employee relations and reputational costs associated with a termination that is not done properly, not to mention increased stress and tension for the people involved.
For more information on terminations and special considerations arising this year, see Jennifer Heath’s blog What’s Weird About Terminations in 2021?
[1] In light of its finding of repudiation, the Court held that it was unnecessary to determine whether the contractual provisions also violated the ESA – in other words, the repudiation finding alone was enough to trigger a common law entitlement even if the contractual limits on her termination entitlements were otherwise enforceable. However, for completeness, the Court made an alternative finding that the provisions were also unenforceable for violating the ESA.
[2] Contractual termination provisions that fail to comply with the minimum requirements of the ESA will not be enforced by a Court or Tribunal.
