If you are an executive or senior-level employee facing termination in Ontario, understanding your severance entitlements is an important part of planning your next steps. Because of the complexity of executive compensation, senior executives may receive severance offers that do not fully account for everything they may be entitled to under Ontario employment law.
Stock options, restricted share units (RSUs), long-term incentive plans (LTIPs), bonuses and other forms of compensation can comprise a significant portion — sometimes even a majority — of an executive’s total compensation. These arrangements can make determining severance entitlements more complicated, particularly when employment ends before bonuses are paid or stock awards have vested. Understanding how these forms of compensation are treated upon termination can help executives make informed decisions before accepting a severance package.
What Should Executives Consider Before Signing a Severance Agreement?
Before signing an executive severance package or termination agreement, it is important to understand whether the offer reflects your potential entitlements under Ontario employment law. Employment contracts and incentive plans may contain provisions that attempt to limit compensation during the common law reasonable notice period. However, these provisions are not always enforceable. Ontario courts have examined whether contractual language clearly and effectively limits an employee’s entitlement to bonuses, stock options and other forms of compensation following termination.
IMAX: When Can Employees Claim Unvested Stock Options and RSUs?
In O. v. IMAX Corporation, 2019 ONSC 342, the Ontario Superior Court examined whether an executive could recover compensation for stock options and restricted share units (RSUs) that would have vested during the reasonable notice period.
The employee was a 53-year-old senior executive who had worked for the company for 22 years before being terminated without cause. The employee brought a wrongful dismissal claim, including a claim for the value of stock options and RSUs that would have vested during the reasonable notice period.
The employee participated in a long-term incentive plan (LTIP) that included RSUs and stock options, as well as a separate stock option plan. Following termination, the employer refused to provide the unvested awards, relying on provisions in the employee’s award agreements that stated unvested RSUs and stock options would be cancelled when employment ended.
The Court determined that the employee was entitled to a 24-month reasonable notice period. It found that the stock options and RSUs were an integral part of the employee’s compensation and that the contractual provisions did not clearly remove the employee’s entitlement to damages for awards that would have vested during that period.
As a result, the Court awarded damages for the lost RSUs and stock options that would have vested during the reasonable notice period. The Court also accepted evidence that the employee would have exercised the stock options at the earliest available opportunity.
The decision demonstrates that stock options, RSUs and other long-term incentive compensation may form part of an executive’s wrongful dismissal damages. However, entitlement depends on the terms of the applicable compensation plans, the employment agreement and the circumstances of termination. Before accepting a severance package or signing a release, executives should have these documents reviewed to determine whether valuable compensation has been excluded from the offer.
Can Employment Contracts Limit Executive Severance Entitlements?
Executives should carefully review their employment contracts and compensation plans before accepting a severance offer. Although employers may include provisions limiting bonuses, stock options or other incentive compensation following termination, the enforceability of these provisions depends on their wording and the circumstances in which they were introduced or accepted.
Ontario courts have considered situations where employees were not adequately informed about changes to their compensation arrangements. However, employees should not assume that a provision is unenforceable simply because they did not read or understand it.
Equitable Life Insurance: The Importance of Communicating Changes to Bonus Plans
In D. v. The Equitable Life Insurance Company of Canada, 2019 ONCA 512, the Ontario Court of Appeal considered whether a senior executive was entitled to bonus compensation during the reasonable notice period.
The employee had worked for the company for 37 years and held the position of Senior Vice President before being terminated without cause. Following termination, the employee brought a wrongful dismissal claim after the employer denied bonuses that would otherwise have been payable during the notice period.
The employee’s compensation included a long-term incentive plan (LTIP) and a short-term incentive plan (STIP). Over the years, the employer introduced changes to these plans that restricted bonus entitlements in circumstances including termination without cause.
Although the employer had provided copies of the compensation plans, it could not establish that the relevant restrictions had been adequately brought to the employee’s attention when the changes were introduced.
The Court of Appeal upheld the employee’s entitlement to bonus damages during the reasonable notice period, which it determined to be 24 months. The Court found that the bonuses were an integral part of the employee’s compensation and that the employer had not properly communicated the provisions intended to limit those entitlements.
The Equitable Life decision demonstrates the importance of how changes to compensation plans are communicated to employees. Employers may face difficulties enforcing restrictions on bonuses and other compensation when those restrictions have not been properly introduced or communicated.
However, executives should not assume that compensation provisions are unenforceable simply because they did not read or understand them. Employment agreements and incentive plans should be carefully reviewed before signing a severance agreement or accepting changes to compensation.
How Can Stock Options and Incentive Plans Affect Executive Severance?
Executive compensation plans can contain complex rules governing when stock options, RSUs, bonuses and other incentive awards become payable. These rules may affect what an executive receives when employment ends, including whether unvested awards are forfeited or whether vested stock options must be exercised within a specified period.
For example, an executive who resigns before stock options vest may lose the opportunity to exercise those options, depending on the applicable agreement. Similarly, a compensation plan may provide a limited period after employment ends during which vested options can be exercised. Missing that deadline could result in the loss of valuable compensation.
Well-drafted compensation plans may be enforceable. Executives should therefore consider negotiating their executive employment contracts, stock option plans, LTIPs and STIPs before accepting an offer or agreeing to changes in compensation.
Altus Group: The Importance of Understanding Stock Option Agreements
In C. v. Altus Group Limited, 2020 ONSC 2936, the Ontario Superior Court considered a dispute involving an employee’s entitlement to stock options following the end of a working relationship.
The employee had sold a company to the defendant and entered into an agreement providing for 50,000 stock options after three years of service. The agreement required the employee to remain actively employed or continue providing services under a qualifying consulting arrangement at the relevant time.
A subsequent agreement also addressed the vesting of stock options if the employee was terminated without cause before completing the three-year period.
After approximately one year of employment, the employee transitioned to an independent contractor arrangement and later left to pursue another opportunity. The employee subsequently alleged constructive dismissal and claimed entitlement to the stock options.
The Court rejected the claim, finding that the employee had voluntarily left for another opportunity and was not entitled to the stock options under the circumstances.
This decision illustrates why executives should carefully review the terms governing stock options and other incentive compensation before making significant career decisions. Entitlements may differ depending on whether an executive resigns, is terminated without cause or changes employment status.
Before resigning, entering into a consulting arrangement or signing an amended compensation agreement, executives should consider obtaining legal advice about how the decision could affect outstanding stock options and other incentive compensation.
Are Bonuses and Long-Term Incentive Plans Included in Executive Severance?
Bonuses and long-term incentive plans may represent a substantial portion of an executive’s total compensation. When an executive is wrongfully dismissed, an important question is whether these amounts would have been earned or become payable during the reasonable notice period.
The Supreme Court of Canada addressed this issue in a significant decision involving an employee’s entitlement to a long-term incentive payment following constructive dismissal.
Ocean Nutrition: Supreme Court of Canada Addresses LTIP Entitlements
In M. v. Ocean Nutrition Canada Ltd., 2020 SCC 26, the Supreme Court of Canada considered whether an employee was entitled to a long-term incentive payment that would have become payable during the reasonable notice period.
The employee was a long-serving senior chemist who participated in an LTIP that provided for a substantial payment if the company was sold. Following changes to the employee’s responsibilities and working conditions, the employee left the company and was subsequently found to have been constructively dismissed. The company was sold during the employee’s reasonable notice period.
At trial, the employee was awarded a 15-month reasonable notice period and an LTIP payment of approximately $1.09 million. The Nova Scotia Court of Appeal reversed the LTIP portion of the award, but the Supreme Court of Canada subsequently restored it.
The Supreme Court explained that damages for wrongful dismissal generally reflect the compensation an employee would have received had proper notice of termination been provided. This can include bonuses and incentive payments that would have become payable during the reasonable notice period.
The Court considered whether the employee would have received the LTIP payment during the notice period and whether the contractual terms clearly removed the employee’s common law entitlement to damages for that payment.
The Supreme Court concluded that the LTIP provisions did not clearly exclude the employee’s entitlement to damages in the circumstances. The employee was therefore entitled to the payment.
What the Supreme Court Decision Means for Incentive Compensation
The Supreme Court’s decision confirms that wrongful dismissal damages may include compensation beyond regular salary, including bonuses and long-term incentive payments that would have been received during the reasonable notice period.
However, not every bonus or incentive payment is automatically included. Entitlement depends on the nature of the compensation, the terms of the applicable agreement and whether those terms effectively limit the employee’s rights.
Executives with significant variable compensation should have their incentive plans reviewed before accepting a severance offer.
Understanding Your Executive Severance Rights in Ontario
Executive severance packages can involve more than salary and benefits. Bonuses, stock options, RSUs, LTIPs and other compensation arrangements may affect the overall value of an executive’s entitlements following termination.
Before accepting an executive severance package, consider the following:
- Review your employment contract and compensation plans. Understand how the agreements address termination, vesting, bonus payments and the exercise of stock options.
- Consider all components of your compensation. A severance offer based only on salary may not reflect the full value of compensation potentially recoverable during the reasonable notice period.
- Understand the effect of signing a release. Accepting a severance agreement may prevent you from pursuing additional compensation.
- Review your options before resigning or changing employment status. These decisions can affect entitlement to bonuses, stock options and other incentive payments.
- Seek legal advice before accepting an offer. An employment lawyer can assess the relevant agreements and help determine whether a proposed severance package reflects your potential entitlements.
For more information about termination compensation, see Monkhouse Law’s resources on severance packages and executive compensation in Canada.
Monkhouse Law’s employment lawyers can help executives and senior-level employees understand their rights, review employment contracts and compensation plans, and assess severance offers under Ontario employment law.