Curated Content Canada: The Limits Of Matthews: Ontario Courts Provide Guidance On A Terminated Employee's Equity Entitlements

As discussed in our previous post, the Supreme Court of Canada ("SCC") recently affirmed that, upon a termination without cause, employees are prima facie entitled during their reasonable notice period to any income, benefits or bonuses that were part of their compensation, and will therefore be entitled to damages for the loss of such compensation, unless the terms of the employment contract or bonus/benefit plan unambiguously take away or limit that entitlement: Matthews v. Ocean Nutrition Canada Ltd.,  2020 SCC 26 ("Matthews").

Two recent Ontario cases provide clarity for employers as to (a) what equity entitlements are considered income, benefits or bonuses for the purpose of this test, and (b) what language is sufficiently clear and unambiguous to take away or limit an employee's entitlement to income, benefits or bonuses during the reasonable notice period.

Shareholdings Are Not Necessarily Employment Entitlements

The decision In Mikelsteins v. Morrison Hershfield Limited, 2021 ONCA 155 ("Mikelsteins") represents the first reconsideration on the issue of termination entitlements in the incentive compensation context by Ontario's Court of Appeal ("ONCA") in accordance with Matthews.

Background

Mr. Mikelsteins (the "Employee") was one of a select group of employees of Morrison Hershfield Limited (the "Employer") who were invited to purchase shares of Morrison Hershfield Group Inc., the parent company of the Employer. The Employee had purchased shares with his own funds during his employment and had shareholdings at the time his employment was terminated without cause. The shareholders' agreement provided for an automatic transfer notice 30 days following the termination of employment (which was not defined) for fair market value, and the shares were repurchased in accordance with these terms.

The Employee then sued the Employer for damages arising from his wrongful dismissal. In 2018, a summary judgment awarded the Employee damages for wrongful dismissal based on a notice period of 26 month and determined he was entitled to:

• continue to hold his shares until the end of his reasonable notice period (meaning the valuation of the shares occurred 26 months following the date of termination), and
• receive damages for the loss of the shareholder bonuses (these were essentially dividends and did not have an individual performance element) that would have been payable during his reasonable notice period.

The Employer appealed the determination regarding the Employee's entitlements to the shares. On appeal the ONCA set these aspects of the judgment aside. The ONCA held that the Employee received his shares pursuant to the shareholders agreement and therefore the terms of that agreement, and only those terms, were determinative of his rights with respect to those shares.

The Employee then sought leave to appeal to the SCC and in December 2020, the SCC determined the case should be remanded back to the ONCA for disposition in accordance with Matthews.

The Reconsideration

Following reconsideration of its earlier appeal decision, the ONCA found that Matthews did not change the outcome for the Employee, as the shares were not an employment right, and the damages would have flowed from the shareholders agreement, and not the Employee's contract of employment. That is, the Employee's entitlement to shares fell to be determined by his rights as a shareholder, not by his status as a terminated employee of the Employer.

Although Mikelsteins will come as welcome relief to employers who offer employees shares and want to avoid the application of Matthews to shareholdings, we would caution that the ONCA specifically noted that the fact the Employee purchased the shares, and was not given them as compensation for employment, was relevant. Employees may still argue that if they are granted shares by an employer, as opposed to electing to purchase shares, that these are income, benefits or bonuses arising from a breach of an employment contract and therefore can be claimed during the reasonable notice period.

What is Clear and Unambiguous Language that Excludes Entitlement?

Employers have also been grappling with the Matthews decision because the SCC did not detail what language would be sufficiently clear or unambiguous to take away or limit an employee's entitlement to any income, benefits or bonuses during the reasonable notice period. 

In Marazzato v Dell Canada Inc., 2021 ONSC 248, Ontario's Superior Court of Justice ("ONSC") provided employers with helpful guidance on the language that would be sufficient. The ONSC found that the language in Mr. Marazzato's long term incentive award agreement was sufficiently unambiguous to exclude his entitlement to payment in circumstances where employment terminated after the grant of units under the agreement but before such units had vested. The ONSC summarized the language it considered to be sufficiently unambiguous as follows:

a) the acceptance of the LTI Award Agreement was voluntary and not a condition of employment;
b) such payments were not compensation for services rendered and were outside the scope of the employment agreement; and
c) the units are "not to be used for calculating any severance, resignation, redundancy, end of service payments, bonus, long-service awards, pension or retirement benefits or similar payments, and you waive any claim on such basis".

Key Takeaways

The treatment of equity upon a termination without cause continues to be highly disputed and a fertile ground for wrongful dismissal litigation. When providing equity grants to employees, employers remain well advised to ensure the applicable grant agreement and plan document explicitly address entitlements upon a termination of employment in a compliant manner, and include very clear ousting language whereby the employee agrees to waive his or her right to damages in lieu of such equity holdings during the employee's reasonable notice period.  The plan and agreement must be presented to the employee prior to the grant being made and the employer should take all reasonable steps to walk the employee through the termination provisions.

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.