When assessing what type of termination package to offer an
employee or what the employer's liability for damages is,
non-salary compensation can become an issue. Typically, this
compensation may include stock options, stock grants and bonuses.
If not resolved at termination (or shortly thereafter) a
determination of "qualification" or "what it's
worth" can contribute to prolonged and protracted issues
between parties. You can guess what that means. This article
discusses what you need to know to provide a fair and reasonable
termination package when it comes to non-salary compensation.
Upon termination, employees will be entitled to compensation for
bonuses they would have earned during the reasonable notice period
if there is a bonus structure worked into the employee's
contract and/or if the bonus can be said to be an integral part of
the employee's remuneration package. Even if it is not
expressly agreed between the employee and the employer that a bonus
is to be paid, if it becomes an integral part of the employee's
remuneration, the payment of a bonus will typically be deemed by
the court as a right vesting to the employee.
Alternatively, if a bonus is rendered as a "gratuitous
offering", discretionary and not an integral or contractual
component of the remuneration package, it may not need to be
included in the employee's termination package.
Courts will be more inclined to determine that a bonus forms an
integral part of the employee's compensation, notwithstanding a
"discretionary" label, if:
The bonus has been paid regularly over a number of years.
The size of the bonus is significant, considering the
employee's overall income.
The bonus would have been awarded had the employee continued to
work for the employer.
The bonus was meant as a reward for past service rather than an
incentive for future service.
Non-terminated employees of similar status receive the
A bonus plan is formula based or is a form of profit sharing
(rather than based on subjective criteria and performance
In the event of a wrongful termination, the amount of bonus to
be awarded in damages is determined generally by the company's
formula, comparing the bonuses received by the other employees
and/or verifying the employee's bonuses for the previous years.
Such methods are also useful in quantifying the amount owing to an
employee at termination to avoid a wrongful dismissal claim.
Generally, stock options are exercised during the period of
employment. However, courts have often classified stock option
plans as benefits and have recognized the employer's obligation
to continue to allow stock options to vest over the duration of the
period for which he or she would have been entitled to notice of
termination. Furthermore, a terminated employee is entitled to
exercise all vested options until the end of the notice period.
A payment in lieu of notice or salary continuance does not, as
with other types of employee benefits, extinguish the right to
stock option benefits during the period of reasonable notice.
However, where the employer has a stock option plan in effect which
clearly indicates that options end when an employee is advised of
the termination of their employment, the wording of the plan may
govern, provided the relevant wording is clear, unambiguous and
In wrongful termination claims, courts will assess damages for
stock options by determining what probably would have happened and
what is reasonable in the circumstances, but for the wrongful
termination of the options. Such an analysis may include the past
trading and selling history of the dismissed employee. Liability
for such damages can be avoided by continuing an employee's
options during the reasonable notice period or contracting out of
such obligations in the wording of the stock option plan.
What this means to you
Incentive compensation, such as bonuses and stock options, will
be treated like any other form of remuneration in a claim for
damages for wrongful dismissal. Therefore, absent unambiguous
contractual language that clearly disentitles employees to benefits
during the period of reasonable notice, reasonable termination
packages should ensure that benefits are continued during the
reasonable notice period and/or that employees are compensated for
the value of the benefits they would otherwise be entitled to
during the reasonable notice period.
The treatment by the courts of this non-salary compensation to
terminated employees often underscores the importance of carefully
worded employment contracts that will, to some degree, take the
unknown out of the equation and will lead to less litigation
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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