How Discretionary is Your Discretion? Alberta Court Awards $440,000 for Lost "Discretionary" LTIP
The Court of Queen’s Bench of Alberta has recently issued a decision that challenges certain assumptions about how discretionary bonus plans, including Long Term Incentive Plans (“LTIP”), may be dealt with on termination of employment. In Styles v. Alberta Investment Management Corporation 2015 ABQB 621 (CanLii), Justice D.A. Yungwirth found that Mr. Styles was inappropriately deprived of the chance to vest toward LTIP awards granted to him during his employment and awarded him significant damages to compensate him for this lost opportunity.
Mr. Styles was employed for approximately three years between 2011 and 2013. In each of these years he was awarded LTIP grants, each with a four year vesting schedule. By way of example, an LTIP award granted in 2011 would not vest until 2015. The precise value of each LTIP award would be determined at the time of payout and would be calculated having regard to the financial position of the company at that time. Mr. Styles argued that the LTIP grants should be treated as earned wages and, further, that the awards were so integral to his total compensation that failing to pay them out on termination would constitute bad faith. He sought payment of the full value of all LTIP awards, including those that were not scheduled to vest until 2017 - four years after the termination of his employment.
The employer, Alberta Investment Management Corporation (“AIMCo”), argued that the LTIP grants were subject to the terms of the LTIP plans, which (a) specifically stated that one had to be an active employee to be eligible for payout of LTIP awards and (b) contained “entire agreement” language excluding any implied obligations to administer the LTIP plan in good faith. It should also be noted that Mr. Styles’ contract of employment contained termination language that limited his claim on termination to three months of base salary only, although AIMCo did not appear to advance this as a means to limit his claim to LTIP after termination.
The Court rejected the arguments of AIMCo and held there is a “general doctrine of contract law imposing, as a contractual duty, a minimum standard of reasonable exercise of discretionary contract power”. This could not be avoided by virtue of an entire agreement clause. The Court went on to find that although the LTIP plan stated that employees must be actively employed to be eligible for payout, the plan also contained some language permitting extended vesting in certain circumstances. Therefore, AIMCo was exercising its discretion when it decided not to allow Mr. Styles to continue to vest toward LTIP awards after his termination. Relying on the recent decision of the Supreme Court of Canada in Bhasin v. Hrynew, the Court held that AIMCo was obligated to exercise its discretion in a manner that was fair, honest and took the reasonable expectations and goals of Mr. Styles into account. Justice Yungwirth noted, “The employer’s right to terminate without cause – which was written into this employment contract – is not undermined by a common law doctrine that subjects the employer’s right or power to a requirement of fair conduct. In other words, though the employer has the right to terminate without cause and thereby determine the composition of its work force, it cannot do so in a manner that unfairly undermines the legitimate contractual interests of the employee.”
Having determined that the vesting of the LTIP awards was discretionary and that AIMCo had to exercise that discretion in good faith, the Court then turned to the specific question of whether or not AIMCo had acted in good faith in terminating Mr. Styles’ employment on a without cause basis without providing him with compensation for lost LTIP. The Court examined Mr. Styles’ performance history and noted that it was “impeccable”. It also noted that even though Mr. Styles’ employment was terminated on a without cause basis, he was given no reason for his termination and no evidence regarding the reasons for termination was put before the Court. This led the Court to conclude that the denial of the LTIP and, in fact, the termination itself was arbitrary and unreasonable. Mr. Styles was awarded $444,205 for lost LTIP.
This decision raises an interesting dilemma for employers: when terminating an employee “without cause”, does it ever make sense to provide the employee with the true reason for the termination? Most employers quite reasonably want to avoid unproductive and potentially upsetting discussions about poor performance or poor fit in the company. Leaving aside the concerns about an unnecessarily difficult termination meeting, employers have been found to be liable for additional damages where the termination was conducted in a manner that caused the employee to experience distress. One can certainly imagine employees arguing that the employer acted harshly and callously by giving them a summary of their performance issues in a without cause termination meeting. Notwithstanding these concerns, the decision in Styles suggests that where significant bonus payments are contingent upon active employment the employer may be well-advised to provide the employee with the reasons for the termination as well as details of the performance issues that should render them ineligible for continued vesting toward long term incentives. Employers may also wish to revisit the terms of their long term incentive plans and employment agreements and consider whether or not they requirement amendment.
If you have any questions about drafting or updating long term incentive plans, we encourage you to reach out to a member of the Cassels Brock employment law group.