Executive Compensation in Wrongful Termination Cases: Is Everything Negotiable, Including Contractual Benefits?

As an employee, it is important to understand how your contractual benefits work in wrongful termination cases. Recent developments in Canadian employment law have brought attention to this issue, and it can have significant financial consequences for employees, especially those in executive positions. In one case, the court awarded an employee a bonus of over $1 million under a long-term incentive plan. In another case, the court granted the employee travel privileges valued over $1.8 million. If you are not aware of your entitlements, you could be leaving a lot of money on the table during negotiations if your employer has not structured your severance package correctly.

What Counts as Contractual Benefits?

Contractual benefits generally include the financial payments and non-monetary benefits provided to an employee on top of their base salary. For executives, contractual benefits often include short-term bonuses, long-term incentive plans (“LTIPs”), and other benefits such as stock options or RSUs. In many wrongful dismissal cases, employees often wonder if their bonuses should be paid out as part of severance package calculations. The answer to that is often yes.

In O’Reilly v. IMAX Corporation, 2019 ONCA 991 (“O’Reilly”), the Ontario Court of Appeal stated that contractual benefits include “pension benefits, bonuses, stock options, or other incentives.”

Sometimes, contractual benefits may include privileges like a company car, a business-paid cellphone, and, at the highest level, access to private travel by rented or owned jet. For example, in Ruel v. Air Canada, 2022 ONSC 1779 (“Ruel”), the Ontario Superior Court confirmed that the flight passes or travel privileges of the plaintiff, who was an executive of Air Canada, would fall with the rubric of “other incentives.”

Legal Framework

In the landmark case of Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 (“Matthews”), the Supreme Court of Canada (“SCC”) affirmed a pivotal doctrine: in the event of an employee’s termination without just cause, that employee is entitled to compensation equivalent to what they would have earned during the notice period, including contractual benefits, unless there is language unambiguously excluding that entitlement.

For employees to claim these contractual benefits during the reasonable notice period, two prerequisites need to be considered under the Matthews framework:

1. Would the employee have been entitled to contractual benefits as part of their compensation during the reasonable notice period?

The SCC confirmed the first arm of the test set out in Paquette v. TeraGo Networks Inc., 2016 ONCA 618 (“Paquette”), with some modifications. It agreed with the Ontario Court of Appeal that “courts should examine whether, but for the termination, the employee would have been entitled to the bonus during the reasonable notice period.”

In favour of the employee, the SCC found that the “integral” test in Paquette is not required in every situation, especially when the benefits are not discretionary. For instance, if the realization event of an LTIP occurs during the reasonable notice period, the LTIP payment is assumed “integral” to his compensation because it is not based on the employer’s discretion.

Courts should only assess whether the benefits are “an integral part” of the employee’s overall compensation in cases where they are discretionary, similar to Paquette.

In other words, if the realization event, such as the maturity date, falls within the reasonable notice period, an employee can say that satisfies the first arm of the test.

2. If yes, do the terms of the employment contract or incentive plan unambiguously take away or limit that right?

The SCC confirmed the second arm of the Paquette test. That is, whether the terms of the employment contract or incentive plan clearly limit or remove that common law right. Courts always interpret the terms in favour of employees.

The SCC noted that only using the terms such as “full-time” or “active” does not remove an employee’s common law right to damages for loss of bonus/incentives, because the employment contract is not considered “terminated” for calculating wrongful dismissal damages until after the reasonable notice period. If the employee had received adequate notice, they would have been actively employed full-time during the reasonable notice period. As such, even if the clause explicitly refers to an “unlawful termination,” it still will not clearly and unambiguously affect the employee’s common law entitlement.

Further, in O’Reilly, the Ontario Court of Appeal held that the simple term “termination for any reason” does not unambiguously take away the employee’s entitlement to contractual benefits upon wrongful dismissal. Similarly, simple language like “termination with or without cause” does not exclude an employee’s entitlement to benefits.

In other words, “unambiguity” means that the exclusion or limiting clauses must be very detailed to clearly cover every circumstance that may lead to the end of an employment relationship. Employees should receive all contractual benefits absent such an unambiguous exclusion clause.

Stock Options and Restricted Stock Units

When it comes to stock options or Restricted Stock Units (“RSUs”), things can be more complex since the concepts of “granting” “vesting”, and “exercising” can be confusing to employees.

When employees are granted either stock options or RSUs, it does not mean they obtain ownership immediately of any shares or cash in lieu. Employees do not own either until they are vested. Typically, they vest in tranches over a period of time, such as 25% per year over four years.  Once stock options are vested, an employee has the right to “exercise” the vested options by purchasing shares at a pre-determined price (of great value if the business is doing well and the stock price is rising).  In contrast, once an RSU is vested, the employee is usually paid out in shares, without having to purchase them, or provided with a cash amount pegged to the price of shares, depending on the RSU plan’s terms.

For employees fighting wrongful dismissal cases involving stock options or RSUs, the key is examining the language used in the plans. Specifically, they need to see if the exclusion clause unambiguously restricts or eliminates the stock options or the RSUs from being vested during the reasonable notice period. If it does not, the employee likely has the right to continue the vesting process even after termination.

Conclusion

Employees are generally entitled to nondiscretionary contractual benefits during the common law notice period, unless their employment contracts or bonus/incentive plans clearly and unambiguously limit or remove the entitlement.

The intricate legal interplay between wrongful dismissal cases and contractual benefits, like bonuses, incentives, stock options, and RSUs, underscores the necessity of understanding how courts have looked at employees’ termination entitlements and the importance of carefully examining the contractual language. In navigating the complexities of contractual benefits, employment documents and termination packages, employees are strongly advised to engage legal counsel to ensure their rights and entitlements are safeguarded.