United States: Ontario, Canada: What Is An Employee's Entitlement To Incentive Plan Compensation During The Notice Period?

Last Updated: September 3 2019
Article by Rhonda B. Levy and Monty Verlint

In Manastersky v. Royal Bank of Canada, 2019 ONCA 609, the Ontario Court of Appeal ("OCA") considered the important question of whether a terminated employee is entitled to be awarded damages in lieu of a lost opportunity to earn incentive plan compensation during his or her reasonable notice period.1 The OCA's decision indicates that the answer lies in the contractual language of the incentive plan, which must be strictly examined.

Background

The employee was recruited in 2001 by the RBC Dominion Securities ("RBCDS") to work as a director of a Mezzanine Fund that invested in established companies with a track record of positive cash flow. During his employment, the employee participated in incentive compensation plans, and from 2004 until his termination in 2014, he participated in a specific incentive compensation plan. The employee was allocated points in that specific incentive compensation plan representing his share in the aggregate profits and losses for two separate portfolios, Fund 1 and Fund 2. At the time of the employee's termination, these points were fully vested.

In mid-2013, the employee was notified that RBCDS was considering putting an end to its continued reinvestment in the Mezzanine Fund. In February 2014, he was informed that his employment would be terminated without cause effective that month, and he was offered his base salary, bonus payments and benefit entitlements for 13 months. In June 2014, the employer took steps to terminate the incentive compensation plan that the employee participated in. As the Mezzanine Fund was wound down in 2015 and 2016, the employee was paid what he was entitled to in respect of his participation in Fund 1 and Fund 2, the only funds that existed at the time of his termination.

The employee refused the termination offer and sued the employer for wrongful dismissal.

Decision of the Trial Judge

As noted above, the primary issue in this case was whether the employee was entitled to be awarded damages for the lost opportunity to earn incentive plan compensation during the notice period.

The trial judge concluded that the employee should have received 18 months' notice of termination. He held that by cancelling the funds and thereby depriving the employee to earn income from them, the employer constructively dismissed the employee. The trial judge decided that the employee was entitled to an amount beyond the profits he had received from Fund 1 and Fund 2. He concluded that the employee's wrongful dismissal damages should include incentive plan compensation in the amount of $953,392 for a lost opportunity to earn entitlements under the incentive compensation plan during the 18 month reasonable notice period. This sum was calculated based on the incentive plan compensation the employee earned historically.

Decision of the OCA

The OCA overturned the trial judge's decision and held that the employee was not entitled to incentive plan compensation during the 18 month notice period. The court concluded that the trial judge made a palpable, overriding and reversible error when he failed to conduct an examination of the terms of the relevant incentive compensation plan. The OCA set aside the trial judge's award to the employee.

Applicable Legal Principles

The OCA confirmed and reiterated several key legal principles set out in prior precedent:

  • When an employer terminates an employee without cause, the employer is liable to the employee for damages for breach of contract, measured by the loss of wages or salary and other benefits that would have been earned over the notice period;
  • The terminated employee is entitled to a common law claim for damages for the loss of pension benefits the employee would have earned had the employer not breached the contract of employment, and for the loss of bonuses or incentive payments that are an integral part of the employee's compensation; and
  • When considering a claim by a terminated employee for damages with respect to benefits payable under such plans during the period of reasonable notice, the court should ask the following questions:

a. Does the employee have a common law right to damages for breach of contract?

b. Does the plan contain a contractual term that alters or removes a common law right and was it brought to the attention of the employee?

Application to the Facts of the Case

The OCA's approach focused on the contractual language of the relevant incentive compensation plan. The court examined its terms in the context of the contract as a whole, an exercise that it noted the trial judge failed to conduct.

In carefully reviewing the incentive compensation plan, the OCA focused primarily on Article 9.3 and Article 4.4. The court noted that Article 9.3 clearly disclosed that one risk of the employee's contract of employment was that the Management Committee could terminate the plan effective as of the end of any Investment Period with respect to future Investment Periods. It noted also that Article 4.4 provided that the status of a participant with respect to any Investment Period "shall not give any Participant the express or implied right . . . to any Points for any future Investment Period." [Emphasis added]

Based on this analysis, the OCA concluded that the employee's entitlement to earn payments under the incentive compensation plan was tied to the existence of the funds created for different "Investment Periods".2 It held that the employee was not entitled to any earnings under the plan during the period of reasonable notice beyond those connected to Funds 1 and 2. Funds 1 and 2 were the only funds that existed during the last decade of his employment and the period of reasonable notice.

In the process of arriving at its decision, the OCA made the following observation:

. . . by awarding Mr. Manastersky damages for earnings beyond those relating to Funds 1 and 2, the trial judge effectively was holding that RBCDS was obligated to establish some notional Fund 3 that would exist at least until Mr. Manastersky's period of reasonable notice came to an end.

The court noted that the incentive compensation plan was the product of an agreement between a sophisticated employer and a group of sophisticated employees. Its terms, including Article 9.3, were fully disclosed to the employee at the time of his offer of employment and the employee signed the plan and amendments to the plan.

Finally, the OCA concluded that because the employer exercised a fully disclosed right to terminate the plan, its termination did not amount to a constructive dismissal.

Bottom Line for Employers

The OCA's decision in Manastersky v. Royal Bank of Canada provides guidance to employers that seek to preclude terminated employees from continuing to earn incentive plan compensation during a reasonable notice period. It suggests that to achieve this end, employers should ensure that all documentation pertaining to the employee's position contains clear and unambiguous terms that eliminate such a right. Employers are therefore encouraged to pay close attention to the language in all of their employment documentation, including the language in their incentive compensation plans, and to clarify what entitlements an employee may have upon termination of employment. While an employer cannot contract out of employment standards legislation, it can take effective steps to limit its common law liabilities.

Footnotes

1 A second ground of appeal, which is not discussed here, concerned the choice of foreign exchange methodology to be applied to determine payments to participants in the incentive compensation plan.

2 At paragraph 13 of its decision, the OCA explains the concept of "Investment Periods" as follows: Under the incentive compensation plan that the employee participated in, investments made by the bank and managed by RBCDS in the Mezzanine Fund were placed into portfolios established for defined "Investment Periods." The first portfolio, Fund 1, covered an Initial Investment Period. Investments made in the subsequent Investment Period were known as Fund 2. When the Fund 2 Investment Period ended, a Fund 3 Investment Period was contemplated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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