Vague settlement language leaves employer on the hook for salary continuance after worker fails to follow terms
Employers should be aware of the recent Ontario Superior Court of Justice case, Cross v. Cooling Tower Maintenance Inc., which serves as a reminder that careful language must be used when drafting “claw back” clauses in settlement agreements relating to a terminated employee’s allegations of wrongful termination.
The employee in this case, Mr. Cross, was terminated without cause on Aug. 22, 2023, after more than 26 years working for Cooling Tower Maintenance Inc. Cross alleged that his employment was wrongfully terminated and eventually negotiated a settlement agreement on Oct. 3, 2023, wherein Cooling Tower agreed to pay Cross various sums, including a 24-month salary continuance.
The settlement agreement contained a “claw back clause” that required Cross to immediately advise Cooling Tower when he obtained new employment, at which time the salary continuance payments would stop and Cross would be entitled to a lump-sum payment equivalent to 50 per cent of the remaining amount owing to him under the agreement. The language of this paragraph was as follows:
“Mr. Cross must immediately advise [Cooling Tower] if he obtains new employment or becomes self-employed during the Salary Continuation Period. Should he fail to notify [Cooling Tower] upon obtaining such new employment … [Cooling Tower] will be entitled to be reimbursed by Mr. Cross for any monies it has paid to Mr. Cross subsequent to his commencing such employment …”
Worker didn’t follow settlement agreement’s terms
Cross started a new job on Feb. 19, 2024, approximately four months after executing the settlement agreement. However, contrary to the settlement agreement’s terms, Cross failed to advise Cooling Tower that he had found new employment and continued to receive the salary continuance payments under the settlement agreement while also receiving salary from his new employer. It was not until June 2024, when Cooling Tower inquired about Cross’s employment, that he admitted that he had been working since Feb. 19.
Cooling Tower subsequently took the position that Cross’s failure to advise them of his new employment was a repudiation of the settlement agreement, refused to pay the 50 per cent lump-sum as would have been required under the agreement, and stopped providing Cross with salary continuance payments as of June 10, 2024.
Cross filed a claim seeking payment of the 50 per cent lump-sum payment (an amount of $161,212.87), as per the terms of the settlement agreement, but acknowledged that Cooling Tower had paid him $45,825.27 between Feb. 19, when he started his new job, and June 10, 2024, when Cooling Tower ceased payments of the salary continuance, and proposed that this amount be deducted from the 50 per cent lump-sum payment.
Cooling Tower counterclaimed, claiming that Cross’s failure to tell them that he was working elsewhere and drawing a salary since February was a repudiation of the settlement agreement. Accordingly, they sought $42,193.89 as the amount that they had paid Cross in excess of his minimum entitlements under the Employment Standards Act. Cooling Tower also sought punitive and/or aggravated damages in the amount of $50,000.
Who breached the settlement agreement?
The issues considered by the court included:
- Did Cross repudiate the settlement agreement by not telling Cooling Tower that he had a new job?
- If there was no repudiation, did Cooling Tower breach the settlement agreement by stopping the payments to Cross after finding out about his new job and, if so, was Cross entitled to the payments owed to him under the Settlement Agreement?
The court found that Cross’s failure to inform Cooling Tower about his new job was intentional, and that it was a material breach, but that it did not amount to repudiation of the settlement agreement. Central to this finding was the court’s determination that Cross’s breach of the settlement did not deprive Cooling Tower of “substantially the whole benefit” of the agreement, as Cooling Tower remained protected from further litigation under the terms of the agreement; and the language of the agreement did not state that the agreement would be repudiated if Cross failed to disclose the fact that he obtained new employment.
Since the court did not find that Cross repudiated the settlement agreement, the terms of the agreement remained valid and binding on the parties. Cooling Tower’s failure to pay was a breach of the agreement and it owed Cross the remaining funds under the Agreement, the court said.
Employer’s withholding of payment a breach
The court ordered Cooling Tower to provide Cross with the 50 per cent lump sum of the amount owing on Cross’s salary continuance ($161,212.87), minus the amount that Cross received after the date that he commenced his new job ($45,825.27).
Employers must remain diligent in ensuring that the clauses in their settlement agreements with recently terminated employees are sufficient and clear in their intentions. An employee’s failure to advise a former employer that they have obtained a new job during a salary continuance period —even when they intentionally hide that information in order to keep receiving the salary continuance while receiving a new salary — is not enough to count as a repudiation of the settlement agreement, if the employer is still benefitting from the agreement and the terms of the “claw back clause” do not clearly indicate that failure to advise the employer of the employee’s new position will be considered a repudiation of the agreement.
Hayley Smith is an employment lawyer and workplace investigator at Turnpenny Milne LLP in Toronto.
