In both provincial and federal jurisdictions, employers often reach an agreement with dismissed or laid-off employees by paying an enhanced severance package or granting advantageous termination conditions in exchange for the signing of a final release in favour of the employer.
Settlement agreements and releases can be advantageous for all parties involved, particularly by allowing them to avoid the delays and costs associated with the legal process. These agreements also help relieve court congestion, thereby directly facilitating access to justice.
However, since 2020, several decisions have challenged the legal weight of such agreements under federal law when signed before an unjust dismissal complaint is filed. Federally regulated employers should therefore be fully cognizant of the latest developments in this area.
The Situation Prior to 2020
Prior to 2020, it was widely recognized that final releases signed prior to the filing of an unjust dismissal complaint could provide a strong defence for federally regulated employers.
In fact, most arbitrators declined jurisdiction over dismissal complaints where a settlement agreement and final release had been signed by the parties, regardless of when exactly that agreement was reached post-termination.
However, the Federal Court of Appeal upended this view in 2020, ruling that the provisions of the Canada Labour Code prevent employers1 from relying on a settlement agreement and final release entered into prior to a complaint being filed to challenge the merits of that claim. In particular, the Court referred to section 168, which stipulates that the provisions of the Code prevail over any contract or arrangement that is inconsistent with it. The Court therefore held that the termination agreement signed by the employee just after her dismissal could not bar the employee from filing a complaint to contest her termination—it could only be taken into consideration when assessing remedies.
The Federal Court of Appeal's reasoning was based in large part on the fact that an employee is not necessarily aware of their right to contest the termination of employment. In this 2020 case, the Court followed an older decision it had rendered more than 20 years earlier, but which had not been widely followed afterwards.
The Current Situation
As of the date of this bulletin, the courts have not yet ruled on a similar case where a settlement agreement and final release were signed in the usual manner upon the termination of employment, before a claim for unjust dismissal was filed.
Nevertheless, several arbitral decisions2 have reiterated, either explicitly or implicitly, the distinction between agreements signed before or after a complaint is filed.
Accordingly, given the current state of the law, it is still risky for any federally regulated employer to enter into a settlement agreement and pay compensation, believing that it will protect itself against any future claims. Employers should be cautious and creative if they want to avoid paying termination pay in the absence of any real consideration.
Practical Recommendations
To mitigate risks, it is recommended that settlement agreements and final releases include explicit clauses stipulating that the employee acknowledges their right to contest under section 240 of the Canada Labour Code, and has nevertheless decided to waive that right, being fully aware of the implications.
Moreover, to avoid paying compensation without any actual consideration, it may be advisable to set a payment delay of more than 90 days, which corresponds to the limitation period for filing a complaint, while making the payment conditional upon proof confirming that no complaint has been filed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
