Does your employment agreement clearly address post-termination benefit entitlements?

by DLA Piper

DLA Piper

An employee’s entitlement to benefits, such as bonus or incentive plan payments, following the termination of his or her employment is an important consideration that should be addressed at the commencement of the employment relationship. Frequently, employment agreements and plan documents contain provisions directed at limiting a dismissed employee’s entitlements. However, recent decisions from the Alberta Court of Appeal in Styles v Alberta Investment Management Corporation, 2017 ABCA 1 (“Styles”) and the Ontario Court of Appeal in Paquette v TeraGo Networks Inc., 2016 ONCA 618 (“Paquette”) highlight the importance of having clearly worded provisions in employment agreements and plan documents in order to limit or eliminate such entitlements.

Styles involved a dispute following a without cause dismissal after three years of employment over an entitlement to Long Term Incentive Plan (“LTIP”) payments. Mr. Styles was employed as an Investment Manager whose terms of employment were subject to an employment agreement containing a set formula for termination pay. Payments under the LTIP did not vest for four years, and the LTIP documents contained language requiring active employment at the time of vesting. The notice period was specifically not considered to be active employment. The Alberta Court of Appeal determined that the employment agreement and LTIP documents left no doubt that Mr. Styles had to be actively employed and the notice period did not qualify as active employment.

Paquette involved a dispute as to whether portions of bonuses were payable to Mr. Paquette after he was dismissed without cause. Bonus payments were governed by annual bonus plans that required he be actively employed at the time of payment. The bonus plans did not contain specific language excluding the notice period from being considered as actively employed. As such, the Ontario Court of Appeal overturned the portion of the trial decision pertaining to the bonus payments and awarded Mr. Paquette the bonus payments he would have been paid had he received working notice.

These decisions confirm that the starting point when determining whether provisions in employment agreement or plan documents limit an employee’s entitlements following termination is that an employee is entitled to receive the compensation package he or she would have received had his or her employment continued during the reasonable notice period. In other words, courts generally include all of the compensation and benefits that the employee would have earned during the notice period.1 For example, such compensation and benefits could include an amount for bonus the employee would have received had he or she continued in his or her employment during the notice period, or damages for the lost opportunity to earn a bonus.2

However, the above presumption can be limited or eliminated with proper language that was brought to the employee’s attention and formed part of the employee’s contract of employment.3 Unambiguous language is required to take away or limit a dismissed employee’s entitlements. Conditions requiring “active service” as a prerequisite for the accrual of a benefit or a provision requiring active employment, without further definition, constitute ambiguous language insufficient to deprive an employee of his or her entitlements.4, 5, 6

In light of the above, employers should carefully consider the terms of the employment agreements and plan documents they utilize to ensure the provisions used contain appropriate language if they intend to limit or eliminate the benefits an employee is entitled to after dismissal without cause.

1Paquette v TeraGo Networks Inc. 2016 ONCA 618, at para. 16.

2Infra, at para 17.

3Infra at para. 18.

4Infra at para 28.

5Infra at para. 47.

6Styles v Alberta Investment Management Corporation, 2017 ABCA 1, at para. 6.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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