Canada: Plain Language In Bonus Plan Prevails: No Employment, No Vesting, No Bonus

Last Updated: January 16 2017
Article by Carl Cunningham and Sara G. Parchello

In positive news for employers, in Styles v Alberta Investment Management Corporation, 2017 ABCA 1 [Styles], the Alberta Court of Appeal (ABCA) affirmed that an employee who does not meet a clear and well drafted condition of eligibility will not be entitled to a bonus payment during the period of notice of termination. The court rejected the trial decision findings that the employer had a duty to reasonably exercise its discretionary power to permit vesting under the plan documents and that the employee was entitled to a payment in lieu of bonus of $444,205.

Background

David Styles began his employment with Alberta Investment Management Corporation (AIMCo) in June 2010. In addition to his base salary and participation in AIMCo's annual bonus plan, Mr. Styles also participated in AIMCo's Long Term Incentive Plan (LTIP), which gave him yearly performance-based "grants" that would vest at the end of a four-year performance period. The most recent version of 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. (at para 6)

AIMCo terminated Mr. Styles employment without cause in June 2013 (i.e., approximately one year before the first LTIP grant would have vested under the plan terms). Consistent with the plain language above, AIMCo took the position that the LTIP grants did not vest and Mr. Styles was not entitled to any pay in lieu of the LTIP. In response, Mr. Styles brought a claim for the total value of the grants awarded over the three years he was employed.

Trial Decision

The trial judge interpreted the Supreme Court of Canada decision in Bhasin v Hrynew, 2014 SCC 71 [Bhasin], as creating a duty on the employer for "discretionary powers granted under a contract" to be "exercised fairly and reasonably". Applying this principle to the case at hand, the trial judge held that AIMCo breached its duty by: (1) terminating Mr. Styles without cause without showing any basis (he had an "impeccable performance" until that point) to terminate his employment and (2) refusing to exercise its discretion to permit the LTIP grants to vest. Mr. Styles was awarded damages of $444,205 representing three years' worth of vested LTIP grants.

Appeal Decision

The ABCA overturned the trial decision and found that based on a plain reading of the LTIP, the contract required Mr. Styles to be "actively employed" on the vesting date to be eligible for a LTIP bonus, "Active Employment" was precisely defined in the contract to exclude any notice period resulting from termination without cause and as Mr. Styles was terminated prior to the applicable vesting date (i.e., completion of any four-year performance period) none of the LTIP grants vested.

The ABCA held that trial judge improperly applied Bhasin. In particular, the ABCA held that Bhasin does not create a duty of "reasonable exercise of discretion" in contractual performance. In allowing the appeal, the court also emphasized the importance of adhering to the written terms of the contract:

Bhasin is not to be used as a tool to rewrite contracts, and award damages to contracting parties that the court regards as being "fair", even though they are clearly unearned under the contract. The respondent contracted for Long Term Incentive Plan bonuses that would only vest if he stayed employed for at least four years, and nothing in Bhasin entitles him to anything more. (at para 54)

In summary, the ABCA quite logically concluded that:

  • The LTIP language requiring a condition of active employment was clear and enforceable.
  • The LTIP did not include any discretion to pay even if the participant was not continuously employed on the vesting date.
  • A decision to terminate an employment contract without cause is not properly characterized as an exercise of "discretion".
  • An employer is not required to provide a "reasonable basis" for the termination without cause (the obligation is to provide notice or compensation in lieu, not reasons that are a reasonable basis).

Key Takeaways

  1. Courts (at least in Alberta) will give effect to the plain language in bonus plans—if an employer's employment agreements and bonus plans are well drafted and expressly rebut the presumption of reasonable notice at common law, such documents can be relied upon to limit an employee's entitlements to a bonus upon termination. However, in light of the recent employee friendly case law in this area (e.g., Ontario Court of Appeal decision in Paquette v TeraGo Networks Inc., 2016 ONCA 618) we recommend that employer's seek legal counsel's assistance in reviewing your employment agreements and bonus plans.
  2. Review bonus plans to:

    1. Ensure compliance with minimum employment standards legislation—bonus plans should be carefully drafted and reviewed to reduce potential arguments the applicable grants/payments/awards are earned prior to termination. Although Mr. Styles' arguments were ultimately unsuccessful, "unfortunate wording"—as described by the ABCA—in AIMCo's plan documents led to time and costs arguing whether the LTIP violated employment standards legislation and whether AIMCo. unlawfully required Mr. Styles to forfeit amounts that were earned.
    2. Contextualize and emphasize the legitimate business reasons for the payment conditions—to reduce the likelihood that a provision is found to be harsh or unconscionable it is preferable if the rationale for active employment is tied back to purposes of the plan (e.g., retain key talent, minimizing risk of transitory performance).
    3. Ensure harmony as between its terms and those of the employment agreement—and state explicitly in the employment agreement and plan text which language will prevail if there is a conflict.
  1. Ensure your employees are aware of the conditions to payment, and that these conditions are broadcast in plan documents and any target award documents—and then have your employees sign-off on such terms (preferably on an annual basis and before the start of the eligibility year) stating that they understand such conditions.

This article was written with the assistance of Tyler Henderson, student-at-law.

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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Carl Cunningham
Sara G. Parchello
 
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