Canada: Court Of Appeal Upholds Dismissed Employee's Right To Damages For Value Of Incentives That Would Have Vested During Reasonable Notice Period

Whether a wrongfully dismissed employee is entitled to damages as compensation for the value of incentives that would have vested during the reasonable notice period is frequently litigated in Canada.¹ In O'Reilly v. IMAX Corporation, 2019 ONCA 991, the Court of Appeal for Ontario upheld a lower court's finding that in the absence of unambiguous contractual language stating otherwise, an employee is so entitled. This decision serves as a reminder for employers to examine their incentive grant documents and other employment agreements to eliminate any ambiguity in incentive entitlement upon an employee's termination.

Background

O'Reilly involved an employee with IMAX Corporation (IMAX) who was a senior sales executive when he was dismissed without cause after 22 years with the company. At the time of his termination, the employee had been granted several awards of stock options and restricted share units (Incentives) that were unvested. The grant documents provided that the Incentives would be cancelled immediately when employment "terminates for any reason." On a motion for summary judgment, the employee sought, among other things, damages for the lost opportunity to exercise his Incentives during the reasonable notice period.

Decision of the Lower Court

The Ontario Superior Court of Justice applied a two-part test to determine whether the employee was entitled to recover damages as compensation for the lost opportunity to exercise his Incentives during the reasonable notice period. According to the test, the court was required to consider:

The court stated that the Incentives would have vested within the employee's 24-month reasonable notice period had IMAX not terminated his employment; they were an integral part of his compensation and therefore a component of his common law right to damages for breach of contract. The court noted that although the grant documents provided that the Incentives would be cancelled immediately when employment "terminates for any reason," this phrase contemplates termination according to law and does not include termination without cause (i.e., unlawful termination). There was no express language in the grant documents stating that the cancellation provisions of the grant documents were applicable to employees terminated without cause. In the absence of such language, the court could not conclude that unlawful termination would trigger cancellation of the employee's Incentives.

In addition, the court found there was nothing in the grant documents or in the employee's employment contract that expressly precluded damages as compensation for lost benefits. The court was satisfied that the employee would have exercised the Incentives as he previously had done. Accordingly, his unlawful employment termination did not cancel his rights to the Incentives within the reasonable notice period of 24 months. The court awarded damages for the lost Incentives that would have vested during the reasonable notice period had his employment not been terminated without cause.

Decision of the Court of Appeal for Ontario

IMAX appealed the lower court's decision pertaining to the employee's entitlement to damages for the lost Incentives. The Court of Appeal dismissed the appeal as it concluded that the motion judge applied the correct legal principles and arrived at the correct conclusion. The court stated that in the absence of unambiguous contractual language, the Incentives continued to vest during the reasonable notice period and the employee was entitled to damages for the loss of his entitlement to exercise his rights.

Bottom Line for Employers

O'Reilly v. IMAX Corporation is another example of a case confirming that employers must be extremely careful to avoid ambiguity in the language they utilize when drafting incentive grant documents and employment contracts. The use of imprecise language can result in an employer being required to pay damages equal to the value of an employee's lost incentives that would have vested during a reasonable notice period. This can be especially expensive when the employee is a senior-level executive who has generous incentives and many years of service, and whose common law notice period may be lengthy.

To help mitigate an employer's liability in this area, employers should regularly review and update their incentive grant documents and employment contracts. In doing so, employers should include appropriate language that provides:

• Their employees' incentives will be cancelled upon termination with or without cause; and

• Employees will not be entitled to damages as compensation for lost incentives that would have vested during the reasonable notice period upon their termination without cause.

Employers should also be cognizant of applicable employment standards legislation and ensure that they do not accidently breach any statutory requirements.

By taking all reasonable steps, employers can avoid an often considerable expense that they did not intend upon terminating an employee without cause.

Footnote

1 See Rhonda B. Levy and George J.A. Vassos, Ontario, Canada: Absent Exceptional Circumstances, 24 Months is "High End" of Reasonable Notice Award for Certain Managers & Adverse Unilateral Changes to Bonus Plans Must Be Communicated, Littler Insight (June 28, 2019); Rhonda B. Levy and Monty Verlint, Ontario, Canada: Appellate Court Decides Employee Rights to Shares on Termination Governed by Shareholders' Agreement, Littler Insight (Aug. 6, 2019); and Rhonda B. Levy and Monty Verlint, Ontario, Canada: What Is an Employee's Entitlement to Incentive Plan Compensation during the Notice Period?, Littler Insight (Aug. 30, 2019).

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.