What is the appropriate treatment under Quebec law of the equity-based incentives of an employee, upon termination of their employment without cause (serious reason)? Twenty years of case law suggest the question is all but simple. In a recent decision on the matter, the Court of Appeal seems to have settled the debate and fully closed the door, only to then open a few windows.

Context

One cannot read the recent decision of the Court of Appeal in Endeavour Canada Holdings Corporation v Boucher, 2024 QCCA 93 (“Boucher”) without context.

For around twenty years, the inherent tension in the debate has been remarkably constant. On the one hand, is a logic of deference to contractual freedom: equity incentives are retention mechanisms that are provided to typically sophisticated and well remunerated managers and governed by detailed agreements that a court will not want to summarily dismiss.

On the other hand, article 2092 of the Civil Code of Quebec (“C.C.Q.”) is inherently protectionist. It protects employees against their own freedom, prohibiting contractual waiver of the legal entitlement to reasonable notice: “The employee may not renounce his right to obtain an indemnity for any injury he suffers where insufficient notice of termination is given or where the manner of resiliation is abusive.”

The pillars of case law

At a very high level, Quebec case law has evolved through phases, to crystallize into a few pillars, sometimes consistent with each other, and sometimes less so:

1. The Aksich framework

The seminal decision of the Court of Appeal in Aksich v Canadian Pacific Railway, 2006 QCCA 931 (“Aksich”), stood and still stands for a simple but all-encompassing notion: consistent with article 2092 C.C.Q., if notice is not given in time and is rather paid, pay in lieu of notice must be equal to “the remuneration that [the employee] would have normally received had they remained employed during the reasonable notice period” (para 118, our translation).

The framework is simple, its logic unassailable. Its scope, however, appears open for debate.

2. Strict applicability of 2092 C.C.Q.

Inspired by Akisch, but in our view, not necessarily required by it, courts have held, often with summary analysis, that the period of reasonable notice, whether actually worked or not, must be considered a period of employment for the purposes of equity incentive plans.

As such, the termination date on which vesting stops, grants are cancelled, etc., is the end date of the reasonable notice period, not the actual last day worked.

This is also how one may interpret the Court of Appeal’s general statement in Fieldturf Tarkett Inc. (Tarkett inc.) v Gilman, 2014 QCCA 147 (“Fieldturf Tarkett”), to the effect that “[18] Quebec law recognizes that bonuses and stock option programs are part of total compensation and are generally due as part of the reasonable notice period.” (our translation).

This approach is also consistent with precedents on the treatment of short-term cash bonuses and other incentives upon termination of employment without cause.

3. Deference to contractual freedom

However, in apparent contrast with the decisions above, Quebec courts have also often emphasized that equity-based incentive plans are typically (i) provided to senior, sophisticated, managers, and (ii) aimed at prospective retention of these managers, as opposed to rewarding past performance.

On that basis, courts repeatedly held that the terms and conditions of equity-based incentive plans and other governing documents, must be respected, unless demonstrably abusive.

The Court of Appeal held in Premier Tech ltée v Dollo, 2015 QCCA 1159 (“Dollo”) (par. 111) that a provision which cancels all unexercised stock options at the time of cessation of employment was not abusive in the abstract (although the exercise of the discretion it granted was abusive in that particular instance).

In IBM Canada ltée v D.C., 2014 QCCA 1320 (“IBM”), the Court of Appeal addressed the applicability of provisions of equity incentive plans in respect of denial of additional grants during the notice period, as follows (our translation):

“[107] In this regard, Mr. C. invokes article 2092 C.C.Q. in support of his claims. According to him, the clauses providing for the premature termination of the benefits provided for in the loyalty plans entail, on his part, a waiver in advance of his right to obtain compensation for the prejudice he suffers in the event of insufficient notice or abusive termination of his employment contract. For Mr. C., the incentives constituted conditions of employment within the meaning of Aksich.

[108] I am prepared to accept the proposition that the incentive agreements were part of Mr. C.'s terms and conditions of employment. However, insofar as they are not abusive, and this is the conclusion I have already reached, they must be applied according to their terms.”

The Boucher decision

In Boucher, a manager terminated without cause was granted eleven (11) months’ worth of indemnity in lieu of reasonable notice by the Superior Court. The only issue on appeal was whether that indemnity should include entitlements under the restricted share unit (RSU) plan (the “Plan”) in which the manager participated during his employment, with respect to the eleven (11)-month notice period.

The employer appellant argued that the Court of Appeal should apply the provisions of the Plan whereby the employee terminated without cause was entitled to vesting of RSUs in pro rata to the period worked during the overall performance cycle (excluding the reasonable notice period).

The Court of Appeal begins its analysis in terms indicative of deference to the terms and conditions of the Plan. The Court considers the Superior Court Judge to have misunderstood the structure of the Plan and the prorated vesting it provides upon termination without cause.

However, after analysis of contractual terms, the Court holds that the provisions of the Plan restricting vesting up to the last day effectively worked are contrary to article 2092 C.C.Q. and as such unenforceable. The termination date for the purposes of the Plan must be understood to be the end date of the reasonable notice period, independently of the terms of the Plan.

In many ways, the Boucher decision settles the debate. The best drafted of plans will not resist the interventionist logic of Quebec employment law. In the words of the Court: “Consequently, the respondent is entitled to an indemnity in lieu of the remuneration "he would have received during the applicable leave period". Paragraph 9c), which stipulates that the period of the notice period is not to be taken into account for the purposes of calculating the pro rata of paragraph 9a), must therefore be set aside, since it is contrary to art. 2092 C.C.Q.” (para. 22, our translation).

However, for every door it closes, the Boucher decision opens a window.

Surprisingly, the Court cites Aksich and Fieldturf Tarkett, but omits mentioning its recent precedents in favour of deference to contractual freedom, especially the IBM and Dollo decisions.

Moreover, the Court indicates that in reading the terms of the Plan, it considers the Plan to be aimed not solely at retention and attraction of managers, but also at rewarding past performance by providing “an additional incentive for their efforts”.

As such, the question remains: would a properly drafted plan, aimed exclusively at prospective retention and not retrospective reward, have influenced the analysis of the Court in favour of deference to contractual freedom, consistent with its own decisions in Dollo and IBM?

It appears that after twenty years, the saga continues, and diligent employers must continue to ensure meticulous drafting of termination-related provisions in equity-based incentive plans.

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