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Without an enforceable employment agreement, upon a without-cause dismissal an employee is entitled to be provided with pay in lieu of reasonable notice including his or her full compensation package during the (often lengthy) common law reasonable notice period, including base salary, benefits, bonuses, stock options and more. In the past several years, Ontario courts have weighed in on the type of language in termination clauses that will effectively limit an employee’s termination entitlements to the minimums prescribed by the Employment Standards Act, 2000 (the “ESA”).

However, in the absence of an enforceable termination clause, employers can still include language in bonus or stock option plans or employment agreement provisions to limit employee entitlement to incentive compensation, such as bonuses or stock options, during the reasonable notice period. We have previously written about guidance from the Ontario Court of Appeal in 2016 regarding what is required to draft language that legally and effectively disentitles employees to bonus entitlement for bonuses earned and/or paid post-termination in an earlier post. The Ontario Superior Court of Justice has more recently followed this guidance from the Ontario Court of Appeal and further clarified bonus disentitlement in O’Reilly v Imax Corporation [O’Reilly]. In O’Reilly the Court considered contractual language that was intended to oust an employee’s entitlement to unvested stock options (“stock options”) and restricted share units (“RSUs”) upon a without-cause dismissal.

O’Reilly involved a senior executive who was dismissed after 22 years of service whose compensation package included not only a base salary, benefits, and commissions, but also bonuses that included stock options and RSUs. The terms of his compensation agreements stipulated that if his employment “terminates for any reason,” any RSUs would be “cancelled immediately without consideration as to the date of termination” and stock options “shall terminate and be cancelled without any consideration being paid therefor”, thereby both reverting back to the employer.

The Court set out the test to determine whether an employee is entitled to damages as compensation for a lost bonus or opportunity to earn a bonus (which was in this case comprised of stock options and RSUs) during the reasonable notice period as follows:

  1. it must form an integral part of the employee’s compensation; and
  2. the wording in the bonus plan must unambiguously alter or remove the employee’s common law entitlement to such a bonus.

The Court ruled that the contractual language “terminates for any reason” and “cancelled immediately without consideration as to the date of termination” or “without consideration being paid therefor” was not sufficiently clear to remove the employee’s right to stock option and RSU compensation during the common law reasonable notice period. Specifically, the contractual language “terminates for any reason” did not reference termination of employment according to the law as a “without cause dismissal” and second, the contractual language did not clearly stipulate that the employee would not be entitled to damages in place of the particular incentive compensation.

The Court referred to Love v Acuity Investment Management Inc. [Love] from the Ontario Court of Appeal for an example of a clause that would expressly limit incentive compensation upon a without cause dismissal. In Love, the bonus plan (in reference to the purchase of shares) had stipulated that if the employee was “terminated by Acuity without cause”, bonus accrual would stop when the employee “cease[d] to be an employee”, which would be the date of dismissal rather than the last day of the common law reasonable notice period. The preamble in Love also made it clear that the agreement in that case applied to every circumstance in which that employee ceased to be employed, further supporting no entitlement to a bonus beyond dismissal. The Court also cited another Ontario Court of Appeal decision, Taggart v Canada Life Assurance Co., that went a step further in directing employers to enforceable contractual language, which can also apply to bonuses. In Taggart, the Court of Appeal indicated the requirement for an express provision that removes the common law right of an employee, dismissed without cause, to claim damages in respect of lost pension benefits that would have accrued during the notice period. Absent such express and unambiguous language in O’Reilly, it was not clear that the employee’s entitlement was displaced during the common law reasonable notice period.

In O’Reilly, because the contractual language did not meet the test to displace entitlement in the reasonable notice period, the employee was awarded the damages for the lost RSUs and stock options that were to be valued as though he had worked until the end of his awarded common law notice period of 24 months.

Takeaway

Employers who provide bonuses and other forms of incentive compensation should ensure to use well-drafted disentitlement language to pre-empt such possible claims upon dismissal. The contractual language should clearly stipulate that in the event of dismissal under any circumstance, the employer will not pay any damages for lost incentive compensation. It should also underscore that employees will not be entitled to damages for the lost opportunity to earn the particular incentive compensation after dismissal. With carefully drafted, enforceable contractual language, employers can avoid costly incentive compensation entitlements for dismissed employees.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.