While settlement agreements are intended to bring finality to wrongful dismissal disputes, they often impose obligations on employees that continue well beyond the date of settlement. This raises an important question: what happens when an employee fails to comply with those post-settlement obligations?

A recent Ontario Superior Court of Justice (“ONSC”) decision examined what happens when an employee fails to comply with one of those ongoing obligations. In Cross v Cooling Tower Maintenance Inc.[Cross], the ONSC considered whether an employee’s failure to promptly disclose new employment during a salary continuation period amounted to a repudiation of the settlement agreement, and whether that breach justified repayment of amounts already received. The decision provides important guidance on how strictly courts will interpret mitigation and disclosure clauses, and when non-compliance will undermine the finality settlement agreements are meant to achieve.

BACKGROUND

The employee had over two decades of service and entered into a comprehensive settlement agreement following a without-cause dismissal. The agreement provided for salary and benefit continuance for up to 24 months. If the employee obtained new employment during that period, he was required to immediately notify the employer, at which point the employer would pay a lump sum equal to 50% of the remaining payments. The agreement also required the employee to reimburse the employer for any payments made after re-employment due to non-disclosure.

The employee obtained new employment but did not advise the former employer for several months. Once the employer learned of the re-employment, it stopped further payments, asserted that the settlement agreement had been repudiated, and refused to pay the agreed-upon lump sum.

DECISION

The ONSC addressed several interrelated issues, beginning with whether the employee’s failure to disclose his new employment amounted to a repudiation of the settlement agreement.

No Repudiation Despite an Intentional Breach

The Court accepted that the employee’s failure to disclose his re-employment was intentional, rather than an innocent oversight. However, it emphasized that repudiation is an exceptional remedy. A breach—even an intentional one—will only amount to repudiation where it undermines the entire foundation of the contract or deprives the innocent party of substantially the whole benefit of the bargain.

The ONSC found that the settlement’s core purpose was to resolve the wrongful dismissal dispute and secure a full release, and that this benefit remained intact. The employee had complied with all other material obligations under the agreement, including the release, confidentiality, and non-disparagement provisions. While the failure to disclose new employment was serious, it did not defeat the agreement’s central purpose.

Critically, the settlement agreement itself expressly contemplated the very breach that occurred. The reimbursement clause addressed the consequence of non-disclosure by requiring repayment of amounts paid after re-employment. The agreement did not provide that failure to disclose new employment would repudiate the agreement or otherwise disentitle the employee to the lump sum payment. The Court found that this supported the conclusion that the parties did not intend non-disclosure to give rise to repudiation.

Employer’s Refusal to Pay the Lump Sum Was a Breach

While the employer was entitled to stop ongoing salary continuation payments once re-employment occurred, the ONSC found no contractual basis to deny the lump sum payment. The reimbursement clause permitted the employer to recover overpayments made as a result of non-disclosure; it did not extinguish the employer’s separate obligation to pay the 50% lump sum triggered by re-employment.

As a result, the Court ordered the employer to pay the lump sum owing under the settlement agreement, while also requiring the employee to repay the overpayments received during the non-disclosure period.

TAKEAWAYS FOR EMPLOYERS

The Cross decision illustrates how courts will enforce settlement agreements as written and will be reluctant to treat post-settlement non-compliance as repudiation, especially if the agreement does not clearly provide for that consequence.

• Draft settlement consequences explicitly. If a failure to comply with post-settlement obligations is intended to disentitle an employee to future payments or bring the agreement to an end, the agreement must say so clearly. Courts will not infer repudiation where the contract already specifies a different remedy.
• Avoid overreacting to a breach: Even intentional non-compliance will not necessarily relieve an employer of its remaining obligations under a settlement agreement. Employers should assess breaches carefully and respond in accordance with the remedies the agreement actually provides.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.