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The Ontario Court of Appeal (“ONCA”) recently released a decision that clarifies the extent to which employers may rely on the terms of shareholder agreements with employees in the post-termination context. Generally, a dismissed employee’s rights in relation to notice or pay in lieu of notice, bonuses, benefits, pension contributions, and other similar entitlements are determined in accordance with any common law entitlements and those under the Employment Standards Act, 2000 (the “ESA”). If an employee’s common law entitlements are limited by an enforceable termination provision and other contractual language, the employee’s entitlements may be limited to the minimum ESA entitlements for the statutory notice period. However, an employee’s entitlements under a shareholder agreement post-termination have not always been clear.

In Mikelsteins v Morrison Hershfield Limited (“Mikelsteins”), the employer (“MHL”) terminated Mr. Mikelsteins’ employment as an executive after 31 years of service on a without cause basis. Mr. Mikelsteins had purchased more than 5000 shares in MHL’s parent company over the course of his employment. These shares were governed by a Shareholders’ Agreement that entitled shareholders to fixed share bonuses based on the number of shares an employee held, which were found to effectively be akin to periodic dividends. Crucially, the Shareholders’ Agreement also included terms whereby MHL was entitled to repurchase all of an employee’s shares 30 days from the date the shareholder is “notified of such termination”, which would become the trigger date. In accordance with MHL’s interpretation of the Shareholders’ Agreement, it paid Mr. Mikelsteins 30 days after the termination of his employment the value of his shares, totaling almost one million dollars. Mr. Mikelsteins brought a wrongful dismissal action against MHL, seeking pay in lieu of reasonable notice and challenging the interpretation of the trigger date in the Shareholders’ Agreement.

The Initial Decision

On a motion for summary judgement Mr. Mikelsteins argued that he was entitled to retain his shares throughout the reasonable notice period and sought damages for the dividends he would have received during the notice period. In granting partial summary judgment, the motion judge ruled that Mr. Mikelsteins was entitled to retain his shares until the end of the 26-month notice period, and that he was entitled to damages for the dividends that would have been payable to him during the 26-month notice period. The motion judge’s decision was based on the principle that an employee must be compensated for all damages flowing from the employment relationship during the reasonable notice period, absent enforceable contractual language that limits an employee’s entitlements during the reasonable notice period. The motion judge held that the Shareholders’ Agreement did not contain clear language ousting Mr. Mikelsteins’ entitlements to dividends during the reasonable notice period. The motion judge’s reasoning is consistent with another Superior Court decision we recently wrote a blog about, with respect to language that may limit an employee’s entitlements upon termination to unvested stock options and restricted share units during the reasonable notice period.

The Appeal Decision

The ONCA overturned the motion judge’s decision, finding that the motion judge had incorrectly conflated Mr. Mikelsteins’ entitlement to compensation arising from the breach of his employment agreement and his contractual entitlements to shares under the Shareholders’ Agreement. The court made a fundamental distinction between two types of employee entitlements upon termination:

  1. those entitlements arising out of a contract of employment (including base salary, bonus, benefits, and employer pension contributions during the reasonable notice period—absent an enforceable termination clause that limits such entitlements to those prescribed by the ESA), and
  2. those entitlements arising out of more specific contracts pertaining to shares, where an employee has no ability to negotiate the terms of such an agreement.

The court held that in this case, the Shareholders’ Agreement provided contractual entitlements to Mr. Mikelsteins that were separate from his common law rights with respect to his employment during the reasonable notice period, such as pay in lieu of notice and continuation of benefits for the reasonable notice period. Due to the distinct nature of the Shareholders’ Agreement as a “take it or leave it” form of contract that also requires a consistent interpretation for all shareholders, the court interpreted the termination of that agreement on its face, with the trigger date after the stipulated 30 days of the employee’s dismissal.

Consequently, the court held that Mr. Mikelsteins was not entitled to retain his shares during the 26-month notice period but was only entitled to the  value of the shares 30 days after the termination of his employment, and was  also therefore not entitled to dividends payable during the notice period.

Takeaway

Mikelsteins affirms that employers can draft and rely on the terms of shareholder agreements to limit employee share entitlements post-termination and that such agreements will generally be interpreted as distinct from employment agreements and bonus plans. While there have recently been some seemingly conflicting decisions on employee post-termination entitlements to incentive compensation such as shares, employers may take comfort that the ONCA has now clarified that employers may rely on the terms of shareholder agreements to prevent employees from continuing to receive share compensation after their dismissal, and that such shareholder agreements will generally not be held to the same high standard of drafting as employment agreements and bonus plans. Employers may thus consider whether they would like to separate employee share entitlements from an employee’s entitlements arising from their contract of employment—such as from his or her employment agreement or company bonus plans and policies—and potentially create more certainty that doing so will more effectively limit an employee’s entitlement to shares upon dismissal. If, on the other hand, employers include an employee’s share entitlements in a contract of employment or a bonus plan without appropriately drafted language, there is the potential that the employee may become entitled to regular share-related payments during the reasonable notice period as well as the value of the shares at the end of the reasonable notice period, which could be much more costly for employers. Even if shareholder agreements are drafted separately from entitlements arising out of a contract of employment, they should be carefully drafted to avoid costly share compensation for dismissed employees.

More broadly, the same principles of having to expressly oust an employee’s common law entitlements for other types of incentive compensation such as bonuses during the reasonable notice period still stand. Employers should continue to exercise caution and limit potentially costly post-termination employee entitlements by drafting enforceable termination clauses for all types of employee compensation.

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

This information is not intended as legal advice.