Unfortunately, lots of terminations are coming across our desks these days. While most employers understand that they need to provide notice of termination, many employees have a variety of different types of compensation which may or may not continue during the notice period. As with many things in law, it depends!
Let’s go over some of the common aspects of executive termination packages.
A Primer on Notice
It all starts with notice! Unless an employee is being terminated for cause, they are entitled to notice of termination. “For cause” or “with cause” terminations are rare, so in most cases and absent egregious employee behaviour, employers will owe employees notice.
The amount of notice will vary. In some cases, notice will be set out in an employment contract, however, a recent Ontario Court of Appeal decision has rendered many contractual notice provisions unenforceable. However, counsel for the employer in the case in question, Waksdale v. Swegon North America Inc. have filed for leave to appeal to the Supreme Court of Canada, so things could change! We will keep you posted!
Where notice is not set out in the contract, it will be determined by statute and the common law. In Ontario, the legal minimum amount of notice is set out in the Employment Standards Act, 2000 at section 57. We call this notice “ESA Notice” or “the legal minimum.” Without an enforceable contract provision contracting into the legal minimum, an employee will be entitled to reasonable notice in accordance with the common law. This amount of notice is – roughly – determined by considering how long it might take an employee to replace the job they are losing. Courts will consider the employee’s length of service, their age, the character of their employment and the job market. Generally, the most an employee can ever hope to get would be 24 months notice. This could be awarded in the case of an employee who is close to retirement age, with very long service to the company and a job that will be difficult to replicate – think senior executive, in her 60s, in her 25th year with the company, making six figures.
Notice can be provided via working notice – where the employee continues to work for the notice period after receiving notice of their termination, as salary continuance – where the employee no longer works, but continues to receive their salary during the notice period or as a lump sum payment which represents the pay they would receive over the notice period but all at once.
So, the employee gets their salary for the notice period – but what about other stuff? Many employees get benefits, annual bonuses, commissions or have long and short-term incentives as part of their compensation. Many of these forms of compensation will come up with respect to the notice period. While things vary from case to case – usually depending on the clarity of the language in the compensation plan – many of these incentives should legally be included in the employee’s termination package. Courts generally see that the period of notice entitles the employee to what they would have received had they been working during the notice period. Working notice isn’t very common, but it’s illustrative when we look at these additional forms of compensation.
Benefits is an easy one! The employee is entitled to their benefits during the notice period. Often insurers will not continue various types of benefits (life insurance, LTD and STD) beyond the ESA notice period, however, employees can have a legal right to these. Check out our classic post on benefits during the notice period for a longer explanation.
Had the employee been allowed to work during the notice period, he or she would have had the opportunity to earn commissions. Accordingly, under the common law and where the commissions are a key component of the employee’s compensation, any notice payment should include an amount for commissions. A commission plan can remove this right, but it needs to do so “unambiguously.” Check out Kerner v. Information Builders (Canada) Inc., 2020 ONSC 2975 for a recent decision on some “ambiguous” commission plan language.
When an employee is not working and therefore not actually earning commissions, the commissions they should receive during the notice period can be determined by looking at what they could have expected to earn during that period. This may be determined by looking at an average of past years or perhaps by looking at the same time period in past years where the commissions might be impacted by seasons.
Like commissions, if a bonus is an integral part of an employee’s compensation, and their right to that bonus is not “unambiguously” removed by a bonus plan, the employee will have a right to a bonus – or their loss of opportunity to earn a bonus – during the notice period. This can be the case even where a bonus is called “discretionary.”
An exception might be a small holiday bonus or the like, which may not necessarily form an integral part of the employee’s compensation.
LTIPS and STIPS
LTIPS and STIPS – long and short term incentive plans – are generally thought of as retention style bonuses. An employee will receive an incentive at the happening of a certain event, generally their being employed on a certain date. The wording of these plans is, again, very important and employees can be entitled to these incentives – or the lost opportunity to earn them – during the notice period. The Supreme Court of Canada recently decided this issue in
Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26. In this constructive dismissal case, the employee was awarded over one million dollars mostly made up of an LTIP that was triggered during his reasonable notice period. Had the employee remained employed during the reasonable notice period he would have earned the LTIP. The Plan document did not unambiguously remove his right to this incentive because a period of reasonable notice is seen as a period of employment.
Employers beware! Your employees may be entitled to more with respect to their terminations than you think! In all cases, forethought and a carefully worded contract, bonus plan etc., introduced at the outset of the employment relationship or later, with appropriate consideration is your friend. If you have questions about termination entitlements, get in touch for a consultation!