Bonus, commission, stock option and other incentive plans and programs form a significant and integral component of compensation for many employees. These plans are drafted by the employer and, often, communicated to employees on an annual basis at the start of, for example, the bonus year. Sometimes the plans are amended, sometimes they stay the same.
In many cases the plans are distributed by email and the employee is required to electronically “accept” the terms of the plan. There is generally little or no negotiation over the terms of the plan and there is typically no discussion or review of the plan with the individual employee. Where the employee raises an issue the response is something along the lines of “this is the plan, it’s been approved by the Board, and it applies to all participants. We’re not going to change it for you.”
In any event, the employee “accepts”, time marches on and then, lo and behold, the employee is terminated. The employer puts together a severance package, but leaves out the bonus or stock options and relies on limiting language found in the plan that, so the argument goes, precludes any bonus payment after the employees’ last day of active employment.
How do the courts view this argument? Look no further than the recent case of Battiston v. Microsoft Canada Inc., 2020 ONSC 4286 (CanLII). Battiston was employed by the defendant Microsoft Canada Inc. (“Microsoft”) for almost 23 years until his termination, without cause, on August 10, 2018. About 30% of his compensation was comprised of bonus payments.
The bonus policy provides that any bonus would reflect an employee’s impact on team, business and customer results over the last year. Battiston was terminated shortly after Microsoft’s 2018 fiscal year, which ended June 30, 2018. He was advised that he would receive no merit increase and no cash bonus for the 2018 fiscal year.
Microsoft took the position that following his termination, Battiston was no longer entitled to the vesting of any granted but unvested stock awards.
The Court considered the usual factors and determined that the common law period of reasonable notice for Battiston was 24 months.
The damages principle in these cases is well established. The Court of Appeal summarized it in Dawe v. The Equitable Life Insurance Company of Canada, 2019 ONCA 512:
Damages for wrongful dismissal generally include all compensation and benefits that the employee would have earned during the notice period: Paquette v. TeraGo Networks Inc., 2016 ONCA 618, 352 O.A.C. 1, at para. 16. This amount may include bonus payments that the employee would have been entitled to had they continued to be employed during the notice period: at para. 17. In Paquette, at paras. 30-31, this court articulated a two-part test for determining whether a wrongfully dismissed employee is entitled to damages for the loss of bonus entitlement: (1) was the bonus an integral part of the employee’s compensation package, triggering a common law entitlement to damages in lieu of bonus?; and (2) if so, is there any language in the bonus plan that would specifically remove the employee’s common law entitlement? See also: Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619, 352 O.A.C. 10, at paras. 84-86; Singer v. Nordstrong Equipment Limited, 2018 ONCA 364, 47 C.C.E.L. (4th) 218, at paras. 21-22; Bain v. UBS Securities Canada Inc., 2018 ONCA 190, 46 C.C.E.L. (4th) 50, at para. 9.
Bonus and other merit increases were a significant part of Battiston’s income. He had received a merit increase and cash bonus every year from Microsoft except the last year of his employment. The Court concluded that “Battiston is entitled to damages for the lost opportunity to earn a merit increase and cash bonus during the notice period.”
The Court dismissed Battiston’s claim for a merit increase and cash bonus for fiscal year 2018 and Microsoft acted reasonably in not doing so.
The Court then looked at the stock option plans to determine if there was any limiting language that would impact the assessment of entitlement and damages.
The plans did contain such language. The Court considered that the award of a stock bonus to a Microsoft employee, including Battiston, was communicated by an email and that the plaintiff received these emails each year and he would simply click “accept” without reading the plan.
The judge considered the wording in the plan and concluded that the “Stock Award Agreement unambiguously excludes Battiston’s right to vest his stock awards after he has been terminated without cause.”
But that wasn’t the end of it. The judge then went on to consider the limiting provisions in the plan were unenforceable for “lack of notice” in that Microsoft never specifically drew the provisions to the plaintiff’s attention.
The Court agreed that this was fatal to Microsoft’s argument and, thus, it could not rely on the limiting language in the plan to avoid damages under the plan.
In Paquette v. TeraGo Networks Inc., 2016 ONCA 618, the Ontario Court of Appeal stated:
Where a bonus plan exists, its terms will often be important in determining the bonus component of a wrongful dismissal damages award. The plan may contain eligibility criteria and establish a formula for the calculation of the bonus. And, as here, the plan may contain limitations on or conditions for the payment of the bonus. To the extent that there are limitations, the question may arise as to whether they were brought to the attention of the affected employees, and formed part of their contract of employment. The latter issue does not arise here, however, as the appellant did not dispute that he was aware of the plan’s terms. [Emphasis added]
The issue didn’t have to be decided in Paquette, but there are cases that support the proposition that a failure to communicate “the bonus eligibility precondition to the [employee] or obtained his assent or agreement to it precludes any reliance by the [employer] on the precondition to defeat the [employee’s] bonus claim.” (see: Poole v Whirlpool Corp., 2011 ONCA 808; Dawe v. The Equitable Life Insurance Company of Canada, 2019 ONCA 512; MacQuarie Equipment Finance Ltd. v. 2326695 Ontario Ltd. (Durham Drug Store), 2020 ONCA 139).
The Court in Battiston concluded that:
I find that the termination provisions found in the Stock Award Agreements were harsh and oppressive as they precluded Battiston’s right to have unvested stock awards vest if he had been terminated without cause. I also accept Battiston’s evidence that he was unaware of these termination provisions and that these provisions were not brought to his attention by Microsoft. Microsoft’s email communication that accompanied the notice of the stock award each year does not amount to reasonable measures to draw the termination provisions to Battiston’s attention. Accordingly, the termination provisions in the Stock Award Agreements cannot be enforced against Battiston. Battiston is entitled to damages in lieu of the 1,057 shares awarded that remain unvested. [Emphasis added]
Judgment was, for the most part, in the plaintiff’s favour.
Incentive plans contain a lot of what I hear called “boilerplate”, meaning it’s in everyones plan. Typically the so-called boilerplate contains terms that are detrimental to the interests of an employee. For example, terms that purport to limit damages post-termination through the period of common law reasonable notice.
These plans are often communicated electronically, without discussion or explanation, and without any negotiation. The employee accepts electronically or in some other way and a record of that acceptance is put in the file.
That approach isn’t something that has or will get a lot of mileage before a court. But employers can follow best practices, and communicate the terms of the plan well in advance and in a transparent manner including by bringing limiting provisions to the attention of the employee and having the employee specifically acknowledge having read, understood those provisions including the limitations they impose. Give the employee time to think about it and, if they want, they should speak with a lawyer.
For a variety of reasons, employers are sometimes loathe or reluctant to follow what they might see as a “waste of time” because, no matter what, they aren’t changing the terms of the plan, so “who cares” what the employee comes back with.
A properly drafted contracted is important, but that might not withstand judicial scrutiny as Battiston shows. The reality is that process is also important. Communication, notice and transparency is the goal. The cases bear that out and while there’s no guarantees in law, the Battiston case is a good recent example of some of the issues.