Canada: Styles Overturned: Alberta Court Of Appeal Clarifies Treatment Of Incentive Payments Upon Termination

In Styles v. Alberta Investment Management Corporation (Styles), a recently released decision that has been eagerly awaited by employers and employees alike, the Alberta Court of Appeal (Court) clarified the law with respect to how long-term incentive plans (LTIP) should be treated when an employee is terminated.

In doing so, the Court overturned a trial-level decision that would have greatly expanded the entitlements of employees upon termination of employment and provided welcome clarity on an employee's post-termination right to long-term incentive payments.

BACKGROUND

This dispute concerned a claim brought by an employee, David Styles, against his former employer, the Alberta Investment Management Corporation (AIMCo), following the without cause termination of his employment. Notably, the claim was not related to the amount of notice or pay in lieu thereof to which Mr. Styles was entitled; such amounts were clearly governed by the employment contract. Rather, the dispute turned on whether Mr. Styles was entitled to the payment of bonuses under AIMCo's LTIP following the termination of his employment.

The LTIP in this case was a relatively standard form document, which provided that:

• Grants were allocated to participating employees on a yearly basis, but no rights vested and no bonus became payable until a four-year period had expired
• Participating employees had to be actively employed on the vesting date to be eligible for a bonus

By extension, a participating employee whose employment lasted less than four years and was no longer actively employed by AIMCo on the vesting date would not be entitled to or eligible for a bonus under the LTIP.

Mr. Styles had been employed by AIMCo for less than four years at the time his employment was terminated. He demanded the value of his unpaid LTIP amounts from AIMCo on termination, but AIMCo refused, citing the terms of the LTIP. Mr. Styles brought an action for such amounts.

Trial Decision

Mr. Styles succeeded in his argument at trial. The trial judge found that the bonuses under the LTIP were payable to him. This decision was based on the Supreme Court of Canada's decision in Bhasin v. Hrynew, wherein a "general organizing principle" of honesty in the performance of contract was recognized (for more information on Bhasin v. Hrynew please see our December 2015 Blakes Bulletin: Termination of Contracts — Good Faith Implications). The trial judge expanded such principle to include a "common law duty of reasonable exercise of discretionary contractual powers."

On this basis, notwithstanding the LTIP's plain wording and the fact that there was no evidence of bad faith at play in the decision to terminate Mr. Styles' employment, the trial judge found that AIMCo's actions were an unfair exercise of discretion that created circumstances under which Mr. Styles could not receive his LTIP grants.

Consequently, the trial judge awarded Mr. Styles C$444,205 in damages for lost bonuses under the LTIP. Interestingly, such damages were calculated based on the entire four year vesting period for the bonuses under the LTIP and not by reference to the reasonable notice period in this case (as is standard in such cases). AIMCo appealed the decision.

DECISION ON APPEAL

The Alberta Court of Appeal overturned the trial judge's decision. In doing so, it rejected the trial judge's interpretation of the LTIP and dismissed her proposed "common law duty of reasonable exercise of discretionary contractual powers."

The central force behind the Court's decision was the interpretation of the LTIP itself. The plain meaning of the contract was clear: it provided that an employee had no entitlement to a bonus under the LTIP unless he or she was actively employed on the vesting date (e.g., after the four year period had expired). Accordingly, unless Mr. Styles could show some reason why the plain wording of such contract should not govern, he would not be entitled to any bonuses under the LTIP. No such reasons existed here as:

• The decision to refuse payment of bonuses under the LTIP was not truly discretionary
• A decision to terminate an employee without cause is not properly characterized as an exercise of discretion and an employer need not provide a reasonable basis for such a termination

The Court went on to emphatically reject the trial judge's proposed "common law duty of reasonable exercise of discretionary contractual powers." It explained that such principle was unsupported by established authority and in fact contrary to established principles of contract law. Parties are free to act in their own self-interest in the commercial context. It is not for courts to examine contracts to determine whether the bargain at issue makes sense or is fair — that is for the parties to decide.

In this case, Mr. Styles understood what he bargained for when he agreed to employment with AIMCo. Bonuses under the LTIP did not vest for four years. If he wanted access to bonuses under the LTIP in the event that his employment was terminated without cause before the four year period expired, it was — as the Court put it — "incumbent on him to negotiate such a provision."

TAKEAWAYS

In many ways, this decision is a relief for Alberta employers. The trial decision created some uncertainty as to what an employee with unvested rights under an incentive plan would be entitled to in the event his or her employment was terminated without cause. Equally, there was a question as to whether employers should develop appropriate contingencies into their practices as a result.

The Court's decision in Styles (and the extensive reasoning that accompanied it) has — barring an appeal to the Supreme Court of Canada — put such questions to rest in Alberta. The plain language of incentive plans will govern the accessibility of such entitlements when employees are terminated without cause. If an employee's rights under an incentive plan have not vested at the time his or her employment is terminated and there is no language to the contrary, he or she will not be entitled to such amounts on termination. The reasoning behind such a principle is clear: parties should get what they contract for, even in the employment context.

Additionally, the Court's emphasis that courts do not have a mandate to examine the content of contracts to determine whether a bargain makes sense places helpful boundaries on the arguments that employees can raise post-termination. In simple terms, as long as employment agreements and associated incentive plans meet statutory minimums and are not otherwise discriminatory, an employee will likely be required to adhere to the bargain he or she agreed to.

Based on such reasoning, it is prudent for employers to invest time at the outset of an employment relationship to ensure that all of an employee's entitlements are clearly dealt with in the event of termination. As Styles demonstrates, clear language will govern and employers with ambiguous incentive plans run the risk that such plans will be interpreted contrary to their interests moving forward.

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.