CHAUDHRI: Double-dipping loophole in settlement agreements
· Toronto Sun
Termination after many years of service can be among the most painful events in a person’s life.
Naturally, one would feel entitled to a large payout acknowledging the loss.
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But employment law doesn’t work that way. Aside from statutory payments, employees have some obligation to prove their damages after a termination. They should apply for comparable work, with an aim to stop the bleeding.
Knowing some employees will reemploy quickly, some employers try to hive off their liability using clawback clauses.
Take for example the case of Cross v. Cooling Tower Maintenance Inc.
Mitchell Cross worked at Cooling Tower for 26.5 years before he was let go without cause in August 2023. He hired a lawyer, negotiated a deal, and signed a settlement in October 2023.
Generous deal included a clawback clause
The deal was generous. It included salary continuance for up to 24 months at his full base of $183,303, plus bonus, profit sharing, benefits, and a vehicle allowance. It also included a clawback clause. If Cross got a new job before the 24 months ran out, the salary continuance would stop and he would be paid a lump sum equal to half the remaining balance. In exchange, Cross had to tell Cooling Tower as soon as he secured a new position.
Cross took a job with a competitor in February 2024 and stayed silent. He kept collecting his settlement amounts for four months while earning a new salary. When Cooling Tower found out, it stopped all payments, refused to pay the lump sum, and countersued Cross for $50,000 in punitive damages, accusing him of repudiating the entire agreement.
At a hearing of the matter, Justice Wilkinson found that Cross had breached the agreement. The court also found he had done so intentionally and rejected his explanation that he had failed to disclose the new job in part due to “procrastination.”
But Justice Wilkinson drew a sharp line between a breach and a repudiation.
Repudiation is the legal doctrine that lets an innocent party walk away from a contract when the other side has shown it no longer intends to abide by the deal. It applies only when the breach undermines the entire foundation of the agreement.
That was not the case for Cross and Cooling Tower.
Cross had complied with every other term of the settlement. He had given up his right to sue, maintained company confidentiality, and had not denigrated his former employer. Cooling Tower’s agreement was drafted in a way to protect it from a wrongful dismissal suit.
However, the issue, and the financial consequence, sat within the clawback clause itself.
The clawback clause said that if Cross failed to report a new job, he had to reimburse any overpayments. The clause, however, did not say a failure to disclose would be treated as a fundamental breach that ended the deal.
The court enforced the clause as it was written. Cross was ordered to repay $45,825 in overpayments. Cooling Tower was ordered to pay the $161,000 lump sum it had promised in the settlement, and its punitive damages claim was dismissed.
The result was that Cooling Tower was out more than $115,000 for trying to walk away from a deal it had signed.
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Settlement agreement missing one sentence
Cooling Tower ended up on the hook for the full payout all because of one sentence its settlement agreement did not contain.
For employers, the lesson from this decision is simple. Courts will enforce the settlement you signed, not the one you wish you had drafted.
There are a few practical steps every employer should take before signing off on a settlement deal.
First, understand what a clawback clause actually does. It claws back overpayments and nothing more. It does not end the agreement, it does not cancel the remaining payments, and it does not stop a former employee from walking away with a double-dipping windfall.
Second, if a failure to disclose new employment is meant to be a deal-ending event, the agreement has to say so in plain words. That language is not standard in most settlements. It should be considered in any deal with a long salary continuation period and a re-employment payout.
Third, the same rule runs through the rest of the agreement. A clause requiring confidentiality or non-disparagement, for example, gives the employer only what the contract says it gives. If the agreement does not state that a breach ends the deal, the employer may be stuck enforcing the term on its own.
Lastly, do not assume an intentional breach by an employee is enough. The court in this case found the breach was deliberate and still refused to treat it as a repudiation. The contract, not the employee’s conduct, is what the court will read.
– This column was co-written by employment lawyer Sunira Chaudhri and her associate Samantha Khaouli
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The content of this article is general information only and is not legal advice.