January 26, 2017

No Obligation to Pay Long Term Incentive Bonus Upon Termination

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The Alberta Court of Appeal clarified the law with respect to how long-term incentive plans should be treated when an employee is terminated. In the recent decision of Styles v. Alberta Investment Management Corporations, 2017 ABCA 1, the Court of Appeal overturned a trial level decision that greatly expanded the entitlement of employees to long term incentive bonus payments upon termination.

Background

Styles was employed as an investment manager with Alberta Investment Management Corporations (the “Company”). His employment was governed by a written employment contract which provided for a base salary plus potential bonuses. The potential bonuses were governed by the Annual Incentive Plan and the Long Term Incentive Plan (“LTIP”). The Plans were set out in detailed documents which were incorporated into the employment contract.

The Annual Incentive Plan stipulated that bonuses were earned and payable in each year. The LTIP was more complex. The LTIP was designed to generate bonuses on a 4-year overlapping cycle. Employees were eligible to receive a “grant” each year but the vesting period of the “grant” was 4 years. In order to be eligible for an LTIP bonus, the employee had to be an active employee of the company on the vesting date. No bonus was payable under the LTIP for at least 4 years. The LTIP further defined the term “Date of Termination of Active Employment” to mean the termination date specified by the company in the termination notice.

The employment contract specified that Styles could be terminated without cause and provided a formula for payment in the event of a without cause termination. The compensation ranged from three to six months’ salary. The formula did not include any bonus payments.

After three years of employment, the Company terminated Styles’ employment on a without cause basis. The Company provided Styles with pay in lieu of notice of termination pursuant to the formula set out in the employment contract. No bonus payments were issued. Styles argued that he ought to have been awarded bonuses under the LTIP. The matter proceeded to court.

Decision

The Alberta Court of Appeal focused its analysis on the language of the LTIP itself. The LTIP was a detailed document that plainly and clearly articulated the following:

  • bonuses were only paid when they vested under the 4-year cycle;
  • in order to be eligible, an employee had to be actively employed on the vesting date; and
  • “actively employed” did not include a period of notice or payment in lieu of notice generated by a without cause termination.

The Court explained that Styles ought to have understood what he agreed to when he entered into the employment contract. Bonuses under the LTIP did not vest for 4 years. If Styles had wanted access to bonuses under the LTIP in the event that his employment was terminated without cause prior to having completed 4 years of service, he ought to have negotiated such a provision.

Comparison to Ontario Decision

The decision of the Alberta Court of Appeal can be contrasted with a recent decision of the Ontario Divisional Court, Fraser v. Canerector Inc., 2016 ONSC 6071. In that case, an employee brought a wrongful dismissal lawsuit claiming damages for the annual bonus he ought to have received during the reasonable notice period following the termination of his employment.

The employee’s offer of employment, which set out the terms and conditions of the employment relationship, stated “you will also be eligible to participate in our employee bonus plan”. There was nothing else that described the bonus plan. There was no bonus plan nor was there a formula used to calculate the bonuses.

During the course of his employment, the employee had received “discretionary bonuses”. The amount of the bonuses varied widely and were based on the discretion of the owners of the company. The Court noted that while the employee had a right to participate in the bonus plan, there was no “contractual entitlement” to an identifiable bonus amount. Furthermore, the evidence established that the employee’s contributions to the employer in the year preceding his termination did not warrant a bonus. For these reasons, the Court concluded that the employee was not entitled to any bonus during the reasonable notice period.

What This Means for Employers

This Alberta Court of Appeal decision is welcomed news for employers who operate bonus or incentive plans. The decision reiterates the certainty that is established by having detailed and well written bonus and incentive programs. Where there is a written plan, the plain language of bonus and incentive programs will govern an employee’s entitlement. Employers can rely on bonus and incentive plans that contain clear and unambiguous language to deny entitlement to any unvested benefits to employees who are terminated without cause. Employers would be wise to review their bonus and incentive plans to ensure that the language contained in the plan(s) is sufficient to oust a claim for unpaid, unvested bonuses following a termination without cause.

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No Obligation to Pay Long Term Incentive Bonus Upon Termination

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