A Breach Is Not A Break: Enforcing Settlement Agreements After An Employee Breach

As part of severance agreements and/or wrongful dismissal settlements, employers frequently include mitigation and clawback provisions to prevent former employees from receiving double compensation following reemployment.

What happens if an employee fails to disclose their re-employment?

Cross v. Cooling Tower Maintenance Inc., 2025 ONSC 7203 answers that question and is a cautionary Ontario Superior Court of Justice decision for employers relying on clawback provisions within their wrongful dismissal settlements. The case confirms that even an intentional breach of a settlement agreement may not amount to repudiation, and that courts will strictly apply contractual terms as drafted and will be reluctant to relieve employers of payment obligations absent clear and express language to that effect.

Background

An employee with 26 years of service was terminated without cause. He commenced a wrongful dismissal action, which the parties resolved through a settlement agreement dated October 3, 2023 (“Settlement Agreement”).

The terms of the Settlement Agreement provided the employee with 24 months of salary continuance. The Settlement Agreement indicated that such payments would cease upon his re-employment. Upon re‑employment, the employee was required to immediately notify the employer, at which point the arrangement converted into a lump‑sum payment equal to 50 percent of the remaining salary continuance. The Settlement Agreement further required the employee to repay any salary continuance received after re‑employment if he failed to disclose his new position.

Shortly after entering the Settlement Agreement, on February 19, 2024, the employee obtained new employment. He failed to notify his former employer until June 2024. During the non‑disclosure period, the employee continued to receive salary continuance payments totaling approximately $45,000.

Once the former employer discovered the non‑disclosure, it ceased further payments and asserted that the employee’s intentional breach constituted a repudiation of the Settlement Agreement, disentitling him to the remaining lump‑sum payment.

The employee brought a claim to enforce the provisions of the Settlement Agreement, specifically his entitlement to the 50 percent lump sum payment.

The former employer filed a counterclaim seeking the amounts paid to the employee in excess of his statutory entitlements. In the alternative, it is alleged that the employee was unfairly enriched by continuing to receive settlement payments while re‑employed. It also sought punitive and aggravated damages.

The Court’s Decision

While the Court found that the employee intentionally – rather than accidentally – failed to disclose his re-employment, it did not amount to repudiation of the Settlement Agreement.

The Court emphasized that repudiation is an exceptional remedy that “requires conduct that deprives the innocent party of substantially the whole benefit of the contract.” Here, the essential purpose of the Settlement Agreement was the final resolution of the wrongful dismissal claim and a full release which was achieved.

Importantly, the Court noted that the Settlement Agreement expressly stipulated the consequence of failing to disclose re‑employment: repayment of overpayments. The agreement did not state that non‑disclosure would disentitle the employee to the 50 percent lump‑sum payment or extinguish remaining payment obligations. Given this, the Court concluded that the employer was not contractually entitled to refuse to pay the lump‑sum payment, and its refusal to do so constituted a breach of the Settlement Agreement.

The employer’s claims for unjust enrichment and punitive damages were dismissed. The Court found no evidence of bad faith, breach of loyalty, or misconduct sufficient to justify punitive damages.

Accordingly, the Court ordered:

• the employee to repay the salary continuance received during the non‑disclosure period; and
• the employer to pay the outstanding 50 percent lump‑sum amount.

Employer Takeaways

Courts will not lightly find repudiation, even where a breach is intentional. Employers cannot assume that non‑compliance with disclosure or mitigation requirements will automatically extinguish settlement obligations unless the agreement clearly says so. This case emphasizes the importance of a well-drafted settlement agreement that clearly outlines the consequences of breach.

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