Can an Employer Void a Severance Settlement After You Find a New Job?

Written on behalf of Peter McSherry

Employment litigation in Ontario frequently ends not with a trial, but with a negotiated settlement. These agreements are intended to bring finality, certainty, and closure for both employers and employees. Yet disputes can arise after the ink has dried, particularly where settlement terms include salary continuation, mitigation obligations, or re-employment disclosure requirements.

The Ontario Superior Court of Justice’s recent decision in Cross v. Cooling Tower Maintenance Inc. provides important guidance on how courts interpret and enforce settlement agreements when an employee obtains new employment but fails to comply strictly with disclosure obligations. The case illustrates both the limits of repudiation as a remedy and the risks employers face when responding aggressively to post-settlement breaches.

A Long-Service Employee and a Structured Severance Settlement

The dispute arose from the termination of a long-service employee after more than 26 years of employment. Following termination without cause, the parties negotiated a comprehensive settlement agreement intended to resolve the employee’s wrongful dismissal claim and related entitlements.

The agreement provided for salary continuation over a 24-month period, along with continued payments reflecting bonuses, benefits, and other compensation components. Importantly, the settlement contemplated the possibility that the employee might secure new employment before the end of the continuation period.

To address this contingency, the agreement imposed two key obligations. First, the employee was required to immediately notify the employer upon obtaining new employment or self-employment. Second, if re-employment occurred, the employer’s obligation to continue periodic payments would cease, and the employee would instead receive a lump-sum payment equal to 50 percent of the remaining amounts owing under the agreement.

The agreement also included a specific reimbursement clause. If the employee failed to notify the employer of new employment, the employer would be entitled to recover any payments made after the employee began earning income elsewhere.

The Breach: Failure to Disclose New Employment

Several months into the salary continuation period, the employee secured new employment with another company. He began working and earning income, but did not advise his former employer of this development, contrary to the explicit terms of the settlement agreement.

For approximately four months, the employee received both income from his new employer and ongoing payments under the settlement. Eventually, the former employer made inquiries and learned of the re-employment.

At that point, the employer took an aggressive position. It ceased making further payments, asserted that the employee had repudiated the entire settlement agreement, and demanded repayment of all sums paid beyond statutory minimum entitlements. The employer also advanced allegations of unjust enrichment, breach of fiduciary duty, and bad faith, and sought punitive and aggravated damages.

The employee, for his part, acknowledged that he had failed to disclose his new employment as required. However, he denied that this breach amounted to repudiation of the settlement agreement. He commenced an action seeking enforcement of the agreement, including payment of the 50 percent lump sum contemplated upon re-employment, less any overpayments already received.

Both parties brought summary judgment motions, agreeing that there were no material facts in dispute and that the matter could be resolved on the written record.

When Does a Breach Become Repudiation?

At the heart of the case was a deceptively simple question: did the employee’s failure to disclose his new employment amount to repudiation of the settlement agreement?

The court did not accept the employee’s suggestion that his failure to disclose was an innocent oversight. The evidence showed that he continued receiving settlement payments for several months while earning income elsewhere. The court found this conduct to be intentional, rejecting explanations based on forgetfulness or procrastination.

Intentional Breach Does Not Equal Repudiation

However, intentional breach alone was not enough to establish repudiation. The court emphasized that the employee had otherwise complied with the settlement agreement. He had released his wrongful dismissal claim, maintained confidentiality, refrained from disparagement, and expressed a willingness to continue performing the agreement once the breach was identified.

Most importantly, the employer had not lost the core benefit of the settlement. The agreement’s primary purpose was to resolve the wrongful dismissal dispute and provide certainty. That purpose had been achieved. The employer was not facing renewed litigation over the termination itself, nor had the employee sought compensation beyond what was already agreed.

The court also examined the wording of the settlement agreement itself. While the agreement clearly imposed a disclosure obligation and provided for reimbursement in the event of non-disclosure, it did not state that failure to disclose would result in repudiation or forfeiture of the lump-sum payment. The absence of such language weighed heavily against the employer’s position.

Taken together, these factors led the court to conclude that the employee’s conduct, while a material breach, did not undermine the entire foundation of the contract. Repudiation was therefore not established.

Why Settlement Agreements Are Treated Differently

A notable feature of the decision is the court’s emphasis on the special status of settlement agreements. Courts have repeatedly stated that it will be rare for post-settlement conduct to amount to repudiation.

This is because settlement agreements are not ordinary commercial contracts. They represent negotiated compromises that resolve uncertainty and avoid litigation. Allowing one party to escape its core obligations on the basis of a secondary breach risks destabilizing the finality that settlements are intended to provide.

For employers, this underscores a critical point: even where an employee acts improperly after settlement, courts may still enforce the agreement rather than permit wholesale rescission.

Employer Breach: Refusal to Pay the Lump Sum

Having rejected the repudiation argument, the court turned to the employer’s conduct. While the employer was entitled to stop ongoing periodic payments once the employee became re-employed, it was not entitled to withhold the lump-sum payment required by the agreement.

The settlement explicitly contemplated that re-employment would trigger a 50 percent lump-sum payout of the remaining balance. The reimbursement clause addressed overpayments resulting from non-disclosure, but did not eliminate the lump-sum obligation.

By refusing to pay the lump sum, the employer breached the settlement agreement. The court ordered the employer to pay the full lump-sum amount, subject to repayment of the overpayments already received by the employee.

Repayment and Unjust Enrichment: A Partial Victory for the Employer

Although the employer failed on the repudiation claim, it was not left without a remedy. The court enforced the reimbursement clause as written.

The employee was required to repay all settlement payments received after he began earning income from his new job. The court also accepted the employer’s alternative claim in unjust enrichment, concluding that the employee could not retain double compensation for the same period.

However, the employer’s attempt to recover amounts beyond those overpayments by limiting the employee to statutory minimums was rejected. The settlement agreement governed the parties’ rights and, absent repudiation, remained enforceable.

Allegations of Fiduciary Duty and Punitive Damages

The employer also alleged that the employee breached duties of loyalty and good faith by accepting employment with a competitor, and sought punitive and aggravated damages.

These claims failed. The court noted that the employer produced no evidence establishing that the employee owed heightened fiduciary obligations at the time of re-employment, nor any evidence that confidential information had been misused.

What Employees Should Take Away from This Decision

This case provides several important lessons for employees navigating post-termination settlements.

Settlement agreements remain enforceable even when something goes wrong, unless the breach truly undermines the foundation of the contract. Employers bear a heavy burden when claiming repudiation, and courts will not lightly relieve them of their obligations.

Employees should comply carefully with disclosure and mitigation clauses, but they should also be cautious about accepting an employer’s assertion that a settlement is “void” or “cancelled.” That determination ultimately belongs to the court.

Most importantly, this decision reinforces that severance settlements are binding legal agreements (not discretionary gestures) and that employees have meaningful remedies when employers refuse to honour them.

Know Your Rights Before Accepting an Employer’s Position

Termination and severance disputes are stressful, particularly when they resurface after a settlement has already been reached. This decision serves as a reminder that employees are not powerless when employers attempt to rewrite agreements or overstate the consequences of a breach.

If you are facing a dispute over a severance or settlement agreement, especially after securing new employment, obtaining legal advice early can help clarify your rights and prevent costly missteps.

Peter A. McSherry Employment Lawyer Advises Ontario Employees on Severance Packages & Settlement Agreements

Severance and settlement agreements are meant to bring closure, not create new disputes. If your employer has stopped severance payments, accused you of breaching a settlement, or refused to pay what was promised after you found new work, you may still have enforceable rights.

Peter A. McSherry Employment Lawyer regularly represents employees in disputes over termination packages, severance settlements, and employer non-compliance. Our team proudly assists clients in Guelph, Cambridge, and across the GTA. Contact us online or call 519-821-5465 to review your agreement and understand your options before accepting an employer’s position at face value.