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In Canada, when an employee is terminated without notice, he or she can sue for the total compensation, including bonus payments, that the employee would have otherwise received during the notice period if reasonable notice had been given.
The other side of this coin is that employers are free to terminate employees without cause, and without providing any reason for the decision to do so, as long as they provide sufficient notice of the termination or compensation in lieu thereof.
In a recent decision, the Alberta Court of Appeal strongly affirmed employers' right to terminate employees without cause and without giving reasons. Further, the court ruled that there is no good-faith duty on the part of employers to refrain from dismissing employees simply because termination will deprive them of bonus payments that have not yet vested.
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David Styles was terminated without cause and brought a claim that he was entitled to bonuses under the employer's long-term incentive plan (LTIP).
Each year, a "grant" would be calculated under the LTIP. The grants were formula numbers used to calculate the eventual bonus. No rights under the LTIP vested for four years, at which time the adjusted value of the annual grants could be calculated and the bonus formula applied.
The LTIP specified that employees had to be actively employed on the date of vesting in order to receive the bonus payment and clarified that any period of reasonable notice did not qualify as active employment. The LTIP further specified that entitlement to an LTIP grant "may be forfeited upon the date of termination of active employment."
The trial judge had ruled that the employee was entitled to LTIP bonus payments despite the clear wording of the plan. The judge found that the employer had breached the "common law duty of reasonable exercise of discretional contractual powers" when it terminated the employee without giving reasons and when it chose to deny him a bonus payment.
The Alberta Court of Appeal overturned this ruling. It noted that the right to terminate a contract of employment is an implied term of the contract and that exercising that right is not a contractual breach as long as the employer provides reasonable notice or payment in lieu thereof.
The Supreme Court of Canada in 2014 affirmed the existence of a "common law duty … to act honestly in the performance of contractual obligations." However, the Alberta Court of Appeal noted that this simply means that parties may not knowingly mislead each other about matters directly linked to the performance of the contract; it does not create a duty of loyalty, disclosure or forgoing of contractual advantages.
The Alberta Court of Appeal clarified that there is no common law duty to give reasons for termination, nor is there a duty for employers to consider the employee's expectations, for example that they will be employed long enough for their long-term bonus entitlements to vest, beyond what the contract explicitly provides for.
The contract made clear that grants were forfeited on the date of termination of active employment. The court noted that this did not create discretion under the contract. The employer could have chosen not to enforce the contract by making the bonus payment out of goodwill, but any such extra-contractual decision would not result in any sort of common law duty of good faith or reasonableness.
Styles v. Alberta Investment Management Corp., 2017 ABCA 1 CanLII) (Jan. 4, 2017).
Professional Pointer: Canadian employers should take comfort in the Alberta Court of Appeal's clarification of the limits of the common law duty to act honestly in contractual performance. The appeal court overturned a trial decision that placed onerous duties on employers that had not previously been recognized in Canadian employment law. But note that courts in different provinces may interpret the same bonus plan language inconsistently, depending on the circumstances of each case and on the trends in jurisprudence in each province.
Amanda Boyce is an attorney with Stringer LLP, the Worklaw® Network member firm in Toronto.
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