If you are an executive or senior-level employee nearing the end of your employment, you’ll want to carefully plan your next moves to ensure you have an exit plan that works in your favour. Because of the complexity of executive compensation, senior executives may be shortchanged when offered termination or severance packages.
Stock options, restricted share units (“RSUs”), long-term incentive plans (“LTIPs”), bonuses, and other non-traditional compensation structures can comprise a large portion — even a majority — of an executive’s compensation. The increasing dominance of employee stock options has led to more litigation in this area in recent years as new and more nuanced questions arise regarding what happens to particular stock options upon the end of an executive’s employment with a company. So, what is an executive facing termination or resignation to do? Read on to find out some key considerations for executives nearing the end of employment.
1. Don’t Sign Anything on a Whim
Prior to signing any severance package or agreement, consult with a lawyer. Recent cases have suggested that Ontario courts are increasingly unlikely to uphold contracts or incentive plans that slash employees’ compensation over their common law reasonable notice periods unless they expressly and unequivocally contract out of that entitlement.
O. v Imax: Catch-All Language Will Not Limit Employees’ Rights
The Ontario Superior Court case of O. v Imax Corporation, 2019 ONSC 342, demonstrated Ontario courts’ reluctance to uphold punishing contracts that significantly diminish employees’ compensation over the notice period. In O. v Imax, the employee, a 53-year-old high-ranking executive, worked for the defendant for 22 years before being terminated without cause. The employee filed a claim against the defendant for wrongful dismissal. This case dealt with a number of different issues, but one question considered was whether the employee was entitled to damages for the lost value of various stock option grants that would have vested during the reasonable notice period.
The employee was compensated in part through an LTIP, which was comprised of RSUs and stock options, and a Stock Option Plan. Upon termination, the employee was not permitted to take advantage of the yet unvested RSUs and stock options. The employee argued that the Restricted Share Units and stock options received from the defendant were fundamental to the employee’s compensation and claimed damages for the unvested RSUs and stock options that would have vested during the notice period, which the Court determined to be 24 months.
The defendant argued that the employee was not entitled to any damages with respect to unvested RSUs or stock options because of an Award Agreement signed by the employee. This plan stated:
“In the event that the Participant’s employment with the Company terminates for any reason other than death, Disability or for Cause, the RSUs shall cease to vest and any unvested RSUs shall be cancelled immediately without consideration as of the date of such termination. Any vested RSUs shall continue to be settled on the applicable Settlement Date.” (bold italics added by the Superior Court judge)
The employee’s Award Agreement contained similar clauses pertaining to stock options under the LTIP and Stock Option Plan. The defendant therefore argued that the employee’s RSUs and stock options had ceased to vest immediately and without consideration because of the termination, and that all unvested RSUs or stock options should therefore be cancelled and revert back to the defendant.
The Court agreed with the employee and found that the stock options would have vested within the 24-month notice period and that they were an integral part of the employee’s compensation. The Court further found that the clauses did not unambiguously oust the employee’s common law rights, as “terminates for any reason” cannot be presumed to include termination without cause.
As a result, the employee had a common law entitlement to the RSUs and stock options. The Court further accepted the plaintiff’s submissions that the plaintiff would have exercised the stock options at the earliest possible opportunity. Therefore, the plaintiff was awarded damages for the lost RSUs and stock options that would have vested during the reasonable notice period had the employment not been terminated without cause.
The Lesson
If you are participating in an LTIP, think twice before signing a release: your LTIP benefits — as well as many other benefits, variable compensation, and non-traditional compensation — should continue through your notice period.
2. If You Didn’t Know About That Clause, It May Be Unenforceable
It is your obligation to read, seek legal advice on, and understand your employment contracts. However, Ontario courts do not take kindly to unfair play; if your employer has quietly added an unfavourable term to your compensation plan without explicitly drawing your attention to it, it may be unenforceable.
D. v Equitable Life Insurance: Shattering the Status Quo
This was the case in the Ontario Court of Appeal case, D. v. The Equitable Life Insurance Company of Canada, 2019 ONCA 512. The employee worked as Senior Vice President with Equitable Life for 37 years before being terminated without cause. The employee sued for wrongful dismissal after the defendant denied the bonuses that the employee would have earned through the notice period.
The Court of Appeal agreed with the employee on the issue of bonus payments through the notice period. Nine years before the termination, the employee was asked to sign new compensation plans regarding the defendant’s LTIP and Short-Term Incentive Plan (“STIP”). The plans introduced new provisions that substantially limited employees’ bonus entitlements in circumstances of resignation, termination for cause, retirement, death, and termination without cause. These plans were updated from time to time, after which the employee received copies. Although the defendant demonstrated that the employee had been provided with the LTIP and STIP, they could produce no evidence that the consequences of termination were specifically drawn to the attention of the employee.
The Court of Appeal found that the employee’s bonuses were an integral part of compensation and that the changes to the compensation had not been properly communicated. Accordingly, the employee was awarded the bonuses through the 24-month notice period because the language in the contract had not been explicitly pointed out. This was found despite the Court acknowledging that the employee may have been familiar with the termination clause because, as part of the employee’s employment duties, the employee had signed off on termination packages of other employees.
B. v Microsoft Canada: A Major Win by Monkhouse Law for Employees
In B. v Microsoft Canada Inc., 2020 ONSC 4286, a case argued by Andrew Monkhouse and Samantha Lucifora, Monkhouse Law successfully argued that the defendant’s stock plan, which disentitled terminated employees to their unvested shares, was “harsh and oppressive” and ultimately unenforceable, largely because the defendant did not alert the long-term employee to the clause’s introduction.
This case is notable because it effectively renders ineffective the status quo that many reputable employers rely on in limiting employees’ rights to bonuses upon termination. Many companies use the system that Microsoft was using in this case to ensure that they have done due diligence in alerting employees to changes in employees’ compensation structures. However, the Ontario Superior Court affirmed that even this high-water mark is insufficient.
In B. v Microsoft Canada, Monkhouse Law was successful in obtaining the employee’s raises in salary during the 24-month notice period. Additionally, the Court awarded the employee the average bonus during the notice period and the shares that had been awarded but remained unvested at the time of the employee’s termination.
In Battiston, Monkhouse Law was successful in obtaining Mr. Battiston’s raises in salary during his 24-month period. Additionally, the Court awarded Mr. Battiston his average bonus during the notice period and his shares that were awarded but remained unvested at the time of Mr. Battiston’s termination.
Read more abour the case: Monkhouse Law Successful In Obtaining Unvested Stocks For Terminated Microsoft Employee
The Lesson
These cases demonstrate the obligation on employers to not only provide you with information regarding your rights upon termination but also to clearly and openly communicate this information with you.
Although these two cases do not act as a shield for employees who simply neglect to conduct due diligence in reading and understanding the terms of their employment, they do suggest that simply receiving a contract from your employer with information regarding termination may not be enough to effectively limit your entitlement to bonus continuation through your notice period.
3. Understand Your Compensation Policy and What It Really Means
Depending on terms of your compensation plan, your right to exercise your stock options may change with your employment status. For example, if you quit prior to your stocks vesting, meaning you cannot have yet exercised them, you may no longer ever be able to exercise those stocks. In that case, that portion of your compensation is essentially null. Similarly, depending on the terms of contract, might have a grace period after leaving the company to exercise vested options. This supersedes any previous expiry date. In most circumstances, if you miss that date, regardless of when the original expiration date is, you’ve essentially forfeited your ability to exercise the option.
Compensation plans, when drafted well, are enforceable contracts. Sometimes, no amount of legal battles can displace the reality of the contract. Accordingly, executives should be proactive and negotiate their employment contracts, stock option plans, LTIPs, and STIPs prior to signing contracts.
C. v Altus Group: Dangers of Signing an Unfavourable Compensation Contract
The dangers of signing an unfavourable compensation contract were demonstrated in the Ontario Superior Court case of C. v Altus Group Limited, 2020 ONSC 2936. In this case, the plaintiff sold the plaintiff’s company to the defendant and signed a contract stating that the plaintiff would receive 50,000 stock options after three years of service with the defendant. The contract stated:
“except as otherwise provided herein, you must be actively employed with the Company on the last day of the Term or you must have entered into and be providing services to the Company under a consulting agreement on the day that would have been the last day of the Term.”
A later agreement stipulated that if the plaintiff was terminated without cause before the three years was up, any unvested stock options would vest and become exercisable.
The plaintiff worked for the defendant for one year before transferring into independent contractor status. The plaintiff worked for another year before leaving the organization for another opportunity. Upon leaving, the plaintiff alleged that the plaintiff had been constructively dismissed and was therefore entitled to the shares.
The Court disagreed. The Court found against the plaintiff, stating that the plaintiff had “left for greener pastures” and was therefore not entitled to the stock options.
The Lesson
This case demonstrates the importance of doing your due diligence. Prior to signing anything, be it an original compensation plan or subsequent amendments, consult with a qualified employment lawyer to understand the repercussions of singing your compensation contract and to make and negotiate any changes required to structure your compensation plan more favourably. Re-read your contract before making any significant career changes. Be proactive, particularly when it comes to resigning, as resigning from employment and your reasons for doing so may change your entitlements.
M. v Ocean Nutrition: Supreme Court awards bonus earned during common law notice period
Changes may be underway for employees who are compensated in part through stock options, LTIPs, bonuses, and other types of executive compensation.
In 2019, the Supreme Court of Canada heard the much-anticipated case of M. v Ocean Nutrition Canada, which focused specifically on executive compensation and LTIPs. The employee was a long-term senior chemist with the defendant who opted to participate in an LTIP that would be triggered if the company was sold while the employee was still employed. After a series of job changes, the employee resigned. Shortly thereafter, the company was sold.
At trial, the Nova Scotia Supreme Court found that the employee had been constructively dismissed. The trial judge awarded the employee a 15-month notice period as well as the $1,086,893 LTIP payout, which would have vested during the notice period, despite an exclusionary clause that purported to disentitle employees who were not “actively employed” from receiving the LTIP. The defendant appealed the matter to the Nova Scotia Court of Appeal, which upheld the employee’s notice period but reversed the ruling regarding the LTIP, finding that the defendant’s termination clause was valid and disentitled the employee from the payout.
The Supreme Court of Canada allowed the employee’s appeal and restored the decision of the Nova Scotia Supreme Court. The employee was entitled to the $1,086,893 LTIP payout. This decision brought much needed clarity to how stock options, LTIPs, bonuses, and other delayed compensation should be treated when a worker is terminated.
The lower courts had given the employee 15 months of reasonable notice. This meant that for a person in the employee’s position and circumstances, it would take about 15 months to find a comparable position. Like any other employer, the defendant could have kept the employee on for those 15 months or paid the salary that the employee would have received during that time and terminated the employment immediately. The Supreme Court explained that the logical extension of that understanding is that the employee should also be entitled to any other compensation that would have been received if the employee had continued working for 15 months.
The remaining question, then, was whether something in the employee’s contract stipulated that the employee was willing to forgo what would otherwise have been received under the common law during those 15 months. The Supreme Court found that it had not. The employee was given a unilateral contract, meaning the employee could not negotiate the terms of the LTIP, and the LTIP terms did not contemplate these particular circumstances (unlawful termination). Therefore, the employee could not be said to have agreed to forgo the LTIP payment in the event of an unlawful constructive dismissal.
The Lesson
The key takeaway from M. v Ocean Nutrition is that the Supreme Court has stated that employment contracts create an obligation to give a reasonable amount of notice before the termination of the contract. For employees, this means that “pay in lieu of notice” is not just a lump sum of money, it truly represents what a person should have received if they worked through that notice period, including LTIPs or other incentive plans.
Going Forward
The above cases demonstrate the importance of a few key points for executives to consider when negotiating their compensation:
- Simply because a contract purports to limit your rights does not mean it is so. Contracts have defects, and sometimes these defects can be fatal to a clause’s validity.
- If RSUs, stock options, bonuses, or other non-traditional compensation comprise a significant portion of your compensation, it is well worth it to have a lawyer review your options and your contract before you make any moves. This allows you to be strategic in how you part ways with your employer.
- Get a contract review to structure things more favourably for yourself.
- Stay abreast of upcoming changes in the law and how they impact your current contracts.
The experienced, specialized employment lawyers at Monkhouse Law leverage their expertise to best represent your interests. For more information or to discuss your rights and potential options when negotiating your employment contract, compensation plans, or severance agreements, contact Monkhouse Law.