Courts usually treat incentive compensation as part of the compensatory damages owed in lieu of common law reasonable notice of dismissal. However, if the employment contract and/or the incentive plan unambiguously extinguish entitlement to incentive compensation upon notice of dismissal, the agreement(s) will generally prevail over the common law entitlement. In O’Reilly v. IMAX Corporation, the Ontario Court of Appeal once again stressed the importance of using precise language in bonus or stock option plans to deny, or otherwise limit, employee entitlement to incentive compensation during the reasonable notice period.

Key Takeaways

The Ontario Court of Appeal’s decision serves as a reminder for employers of the need to use clear and precise language in an employment agreement and/or incentive plan in order to deny (or circumscribe) entitlement to incentive compensation during the reasonable notice period. A failure to do so can prove costly, particularly for senior and executive level employees with generous entitlements to incentive compensation and with lengthy notice period entitlements. Though not a direct issue in this case, employers should still keep in mind that even clear and unambiguous language will not suffice if it amounts to a breach of local employment standards legislation (which varies from province to province).

Background

The plaintiff in O’Reilly v. IMAX Corporation was a 53-year-old senior executive with 22 years of service when he was dismissed. His compensation package included a base salary, commissions, group benefits, and participation in both a Long Term Incentive Plan, which included both restricted stock units (“RSUs”) and stock options, and a Stock Option Plan (collectively, the “awards”). The relevant plans stipulated that if his employment “terminates for any reason”, his RSUs would be “cancelled immediately without consideration as to the date of termination” and stock options “shall terminate and be cancelled without any consideration being paid therefor”. Thus, both would revert back to the employer, IMAX.

IMAX advised the employee that any awards that had already vested could be exercised for up to 30 days after his termination date. Any awards that had not vested as of that date would be “cancelled and forfeited without any consideration.”

Ontario Superior Court’s Decision

The motions judge found that the employee was entitled to damages, calculated on the basis of 24 months’ reasonable notice, together with all commissions outstanding at the date of termination. The judge also determined the employee’s damages for wrongful dismissal, including the damages for lost opportunity to earn commissions on sales during the reasonable notice period, the pension contributions that would have been made during that period, and the value of benefits lost during the notice period.

The motions judge also concluded that the language of the relevant plans was not sufficient to cancel the employee’s entitlement to exercise the awards or to remove his entitlement to damages for their loss. He was therefore entitled to damages for the loss of the right to exercise the RSUs and stock options that would have vested during the reasonable notice period. IMAX only appealed this latter finding.

Ontario Court of Appeal’s Decision

The Court of Appeal outlined the following principles in assessing whether the language in the plans limited the employee’s right to exercise the RSUs and stock options during the reasonable notice period:

1. A wrongfully dismissed employee is entitled to damages for the loss of wages, salary and other benefits, that would have been earned during the reasonable notice period.
2. This principle applies to bonuses, stock options, or incentives that are an integral part of the employee’s compensation, as well as pension benefits that would have accrued or been earned during the reasonable notice period.
3. In considering whether the loss of such benefits is recoverable, the court undertakes a two-step analysis:

(i) The first step requires a determination of the employee’s common law right to damages for breach of contract, bearing in mind that the measure of damages is the amount to which the employee would have been entitled had the employer performed the contract.

(ii) The second step requires the court to determine whether the terms of the relevant contract or plan unambiguously alter or remove the employee’s common law rights, having regard to the presumption that the parties intended to apply the law, in the absence of clear language to the contrary.

The Court of Appeal held that the motions judge had applied the correct two-step test. The Court of Appeal upheld the motions judge’s finding that the awards were an integral part of the employee’s employment, that they would have vested had his employment not been wrongfully terminated, and that he would have exercised the awards, as he had done in the past. This was the first step of the analysis.

In the second step of the analysis, the Court of Appeal also upheld the motions judge’s finding that the reference to “terminates for any reason” in the plans could not be presumed to refer to termination without cause. Further, he found that the phrase “cancelled immediately without consideration” was not a clear, express provision that removed the common law right of an employee, terminated without cause, to claim damages in respect of lost unvested RSUs. While the language in the plans at issue extinguished the employee’s right to exercise any unvested awards as of the date of “termination”, the plans did not establish, in unambiguous terms, when the date of termination is. Thus, the plans left open the possibility that termination could have occurred at the end of the reasonable notice period. Where such ambiguity exists, the language will be interpreted as mandating a lawful termination. Significantly, there was no additional language to remove any entitlement to damages.