March 2, 2020

Employers are increasingly turning to hybrid compensation structures to create incentive based compensation for their employees. Common examples include bonus incentives, employee stock options, or restricted share units.

Unfortunately, when terminating an employee without cause, it is often unclear what happens with these alternative compensation methods.

The general legal principle is that when terminating an employee without cause, employers must make the employee whole throughout the period of reasonable notice. This requires employers to provide their employee with their salary and benefits earned throughout the notice period, but what happens with the bonus or stock options?

The Ontario Court of Appeal provided some much needed guidance on this in 2019.

Plan Language Must Be Clear and Unequivocal

Employees are entitled to claim damages for loss of alternate compensation methods, particularly where that benefit is an integral part of their compensation, unless there is a contractual term limiting that employee’s common law rights upon termination.

Where a plan contains terms that limit or place conditions on the payment of a bonus, the question the Courts must determine is whether the wording of the bonus plan was sufficient to limit the employee’s common law right to damages for lost compensation. This principle was upheld in O’Reilly v IMAX Corporation, 2019 ONCA 991.

In that regard, the plan language must be clear and unequivocal, and it must be understood by the employee that their right to entitlements under the plan will not persist through the reasonable notice period.

Plan Language Must Be Brought to Employee’s Attention

In addition, the clear and unequivocal language must be sufficiently brought to the employee’s attention, such that it forms part of their employment contract.

In Manastersky v Royal Bank of Canada, 2019 ONCA 609, it was not enough that the plan language clearly ousted the employee’s common law entitlement to damages in lieu of the employee’s incentive compensation, the employer must also bring any limiting language to the attention of the employee prior to signing the employment contract in order for the term to be enforceable.

Take Home for Employers

When drafting alternative compensation incentive plans it is essential to ensure that:

  • The language used clearly and unequivocally conveys what happens to the incentive when the employment relationship ends; and
  • Any limiting language must be discussed with the employee prior to signing the contract to ensure both parties understand what happens if the employment relationship must end.

Having your plans and hiring procedures reviewed by an experienced employment lawyer is the first step to ensuring that your plans are and remain enforceable.

Take Home for Employees

If you’ve been terminated and your compensation includes one or more of these more alternative compensation methods it is worthwhile to consult with an employment lawyer to ensure you are being properly compensated.