News Flash: An employer who does not specify in an employment contract how much an executive is entitled to receive when terminated can pay much more termination pay than expected.
UBS Securities Canada Inc. found out the hard way how the nickels and dimes can add up when it terminated the employment of David Bain who was the Managing Director and Head of Canadian Mergers & Acquisition.
The Nickels & Dimes
The Ontario Court of Appeal recently considered four issues that were decided by the trial judge in this case, namely:
- Was Mr. Bain owed a deferred bonus by way of notional shares that vested after the expiry of an agreed upon 18 month notice period? This part of the bonus was worth $ 1,200,000.
- Was vacation pay owing calculated on base salary or salary and bonus? The difference was $ 81,772.
- Should prejudgment interest be based on the “lump sum” approach or the “instalment” approach? The difference was $44,585.81.
- Should legal costs be determined using the partial indemnity “grid” rates set out in the preamble to Rule 57, “Information for the Profession”, or by using 60% of the actual rates charged by the employee’s counsel? UBS was seeking a reduction of approximately $70,000 in the costs of the action.
The trial judge and the Ontario Court of Appeal sided with the employee on all four issues.
Lessons to Be Learned
- A well drafted employment contract and well drafted variable compensation plans can eliminate legal uncertainty and save employers A LOT of money – especially for senior executives.
- Variable compensation plans including bonus plans can be drafted to clearly state how much compensation a terminated employee is owed and it can be significantly less than the person’s common law entitlement.
- Bonus plans can be drafted so that employees are not entitled to earn vacation pay on bonus income.
- Termination clauses can be drafted so it is more likely that pre-judgment interest damages will be awarded using the less expensive installment method.
- Litigating a wrongful dismissal case can be very expensive. UBS paid its own legal fees plus 60% of Mr. Bain’s fees or $225 000. If UBS’ legal fees were the same as Mr. Bain’s then UBS’ legal costs to go to trial were about $ 600 000.
For over 30 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 directly at 416 317-9894 or at [email protected]
When speaking with a client about other terms of employment that can be included in an employment contract, I always ask whether the organization has an Employee Handbook.
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