As we have written in the past, there is significant legal uncertainly as to whether an employee is entitled to receive incentive compensation during the common law reasonable notice period.
An Alberta Court of Appeal decision appears to have rejected the Ontario Court of Appeal’s approach to interpreting incentive compensation plans for terminated employees. The Supreme Court of Canada recently denied leave to appeal the Alberta case.
In Paquette v. TeraGo Networks Inc., 2016 ONCA 618, the Ontario Court of Appeal concluded that the wording of a bonus plan was crucial in determining whether an employee is entitled to be paid incentive compensation during the common law reasonable notice period. The phrase in a plan which required an employee to be “actively employed by TeraGo on the date of the bonus payout” was found not to limit the employer’s obligation to pay an employee the incentive compensation he would have earned during the common law reasonable notice period. The Court stated that language like this needed “more” to limit the employee’s claim to the bonus.
In this Alberta decision, Mr. Styles entered into an employment contract that contained a long term incentive plan (“LTIP”) which allowed employees to earn a bonus based on performance. As a condition of receiving this payment, the employee had to be employed for four years. Employees also had to be actively employed to be paid the LTIP. Mr. Styles was terminated without cause after three years, meaning that he was not entitled to any LTIP payments. He sued for payment of this compensation.
The relevant clause in the LTIP stated:
Unless otherwise stipulated, participants must be actively employed by AIMCo, without regard to whether the Participant is receiving, or will receive, any compensatory payments or salary in lieu of notice of termination on the date of payout, in order to be eligible to receive any payment.
As per the guidelines above, entitlement to an LTIP grant, vested or unvested, may be forfeited upon the Date of Termination of Active Employment without regard to whether the participant is receiving, or will receive, any compensatory payment or salary in lieu of notice of termination.
“Date of Termination of Active Employment” means the termination date specified by AIMCo in the termination notice. (emphasis added)
The trial judge began their analysis by applying the principle of good faith contractual performance, which provides that parties to a contract must perform their contractual duties honestly and reasonably. From this principle, the trial judge recognized a new common law duty which requires employers to exercise discretionary powers reasonably.
Looking at the wording of the contract and LTIP provisions, the trial judge found there were two discretionary decisions that the employer could make, whether to pay the LTIP, and whether to terminate the employee without cause.
The judge held that the Employer breached this new duty by failing to give reasons for the termination or why he was being denied his LTIP payments. By failing to give reasons, the employer breached its duty to exercise its discretion reasonably.
The judge awarded the employee’s LTIP payments, totalling $444,205.
The Alberta Court of Appeal resoundingly overturned the trial judge’s decision. The Court found that the contract clearly provided that Mr. Styles had to be actively employed to receive the LTIP payment, and there was nothing in the contract that gave the employer a discretion whether to provide the LTIP payments or not.
Further, the Court rejected the trial judge’s new common law duty to exercise discretionary powers reasonably and stated that terminating an employee without cause without providing any reasons in Alberta is fundamental in allowing an employer to choose its composition of its workforce.
The Court of Appeal found that Mr. Styles was not entitled to his LTIP worth $444,205.
While the Court of Appeal considered the Paquette decision, it did not address the Ontario Court’s approach to incentive compensation plans. Unfortunately, the Supreme Court of Canada denied Mr. Styles’ request for leave to appeal.
- As discussed before, some Ontario judges have found ways to override the wording of bonus plans and have awarded terminated employees incentive compensation during the common law reasonable notice period, despite not being actively employed.
- The Alberta case, is a welcome decision for employers, as it came to a different conclusion.
- The Alberta Court of Appeal held that employers are not required to give reasons when terminating an employee without cause. There are, however, certain issues that an employer should consider before terminating an employee without just cause such as whether the employee has recently raised a human rights or harassment complaint and how much notice of termination (or pay in lieu of notice) the employee is entitled to receive.
For over 25 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at [email protected]
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