Toronto faced a similar scenario with veteran right-hander Jon Rauch, but opted to buy out the final year of his contract for $250,000.
The Blue Jays had until Monday night at 11:59 p.m. ET to make a decision on both players. Encarnacion could have been bought out for $500,000, while Rauch was in line to earn $3.75 million next year.
Encarnacion's return seemed inconceivable just five months ago, as he began the season hitting .250 with two home runs and 12 RBIs in his first 55 games. He also struggled in the field by committing 12 errors, and eventually lost his starting job at third base in late June.
The 28-year-old then went through an offensive resurgence at the plate which coincided with a transition to DH. Encarnacion finished the year as one of Toronto's best hitters by batting .286 with 15 homers and 43 RBIs over his final 79 games.
Encarnacion is the favorite to become Toronto's starting DH in 2012, but his salary shouldn't preclude the club from seeking out potential upgrades this offseason. He has the ability to play first and third, but he also spent the last couple of months shagging fly balls in left field.
Rauch now becomes a Type B free agent and could potentially net the Blue Jays a compensation pick in the 2012 First-Year Player Draft if he leaves for another team. But the only way Toronto would be eligible for that extra pick is if the club offers salary arbitration to Rauch.
The 33-year-old went 5-4 with a 4.85 ERA in 52 innings this season. The ERA was his highest since 2002, and his value could be further negatively impacted by right knee surgery that ended his season in early September.
Toronto general manager Alex Anthopoulos will face the tough decision of whether to offer arbitration to Rauch and run the risk of the deal being accepted. The Blue Jays have until Nov. 23 to decide what to do with the nine-year veteran, who is 11-39 with a 3.82 ERA in his career.