June 12, 2012
by Israel Foulon LLP

Employers are often surprised to learn that terminated employees often expect to receive pro-rated amounts for compensation items such as bonus payments, car allowance, stock options, pension plan contributions, and other perks of employment as part of a separation package. The inclusion of such items in a separation package can make the terms of the overall package much more expensive.

Unfortunately for employers, Canadian courts have made it clear that unless employers are extremely careful in the wording of its (1) compensation plans (for things like bonuses, stock options, pension contributions car allowance, etc.) and/or (2) enforceable termination clauses in employment contracts, these compensation plans will be interpreted by the Courts to allow employees to continue to accrue this compensation until the end of the reasonable notice period when employees are dismissed without cause.
Notice periods may be lengthy, especially for long-serving employees or those in the upper echelons of the company. Therefore, this can be an expensive problem.

Solutions

In most cases, the goal of employers should be to limit employees to their regular payments for base salary and regular health and dental benefits during the duration of a separation package. The key for employers to avoiding liability beyond this (for things like bonuses, stock options, pension contributions car allowance, etc.) is to use wording in (1) compensation plans and/or in (2) enforceable termination of employment clauses, that limit an employee’s right to continue receiving this compensation only during “active employment” and that causes the employee to be disentitled to any further such compensation immediately upon “the employee receiving actual notice of dismissal (regardless of any entitlement to common law reasonable notice of termination).”
Despite the uncertainty surrounding this area of the law, the following are steps that can be taken by an employer in an attempt to avoid compensatory damages related to extended compensation payments claimed by former employees during the reasonable notice period:
1. Have a lawyer review the compensation plan provisions or policy wording to determine if the existing or proposed language might lead to unintended results upon termination of employment.
2. The language in the compensation plan or employment contract should be clear, precise and unequivocal. The intention of the employer should not be ambiguous as the Courts will interpret the language in favour of the dismissed employee. Legal advice is highly recommended.
3. The compensation plan provisions or employment contract should use specific language that removes the employee’s ability to receive continued compensation (for things like bonuses, stock options, pension contributions car allowance, etc.) subsequent to notice of dismissal being delivered to the employee (regardless of any right to advance notice of termination) and that restricts the receipt of such benefits to “active employees”.
4. The phrase “actual notice of dismissal” is the preferred wording for limiting the employee’s entitlement regarding compensation plan benefits. Words such as “dismissal” or “termination” will be interpreted by the courts as meaning lawful termination (which means termination with the provision of advanced reasonable notice or damages in lieu thereof), and the employee will be awarded compensatory damages for the loss of the right to receive that compensation during a reasonable notice period.
5. The policy should be delivered to the employees and they should be required to agree to the terms of the plan. The employee’s acceptance of the plan or plan amendments should be documented and placed in their employment file.

Example Case

Poole v. Whirlpool Corporation and Whirlpool Canada LP (Ontario Superior Court, 2011)
In this wrongful dismissal action, the Court evaluated whether Mr. Poole was entitled to a bonus during the common law reasonable notice period, despite not being “actively employed” at each year end. In 2005 Whirlpool’s Bonus Plan statement provided that, “Employees must be actively employed on December 31st to be eligible for the Bonus Plan”. The language limiting benefit eligibility was communicated in the 2005 Bonus Plan, at a time when Mr. Poole was on an international assignment. He had no recollection of ever being given or shown a copy of the Plan during his employment and he was not asked to agree to the terms. This evidence was not contradicted by Whirlpool, instead it stated that the Bonus Plan eligibility requirements were posted on the company’s intranet.
The Court concluded that Mr. Poole’s bonus was an integral part of his compensation and therefore he was entitled to receive payment of the bonus during the reasonable notice period. The Court held that posting Benefit Plan details on Whirlpool’s intranet site alone was not sufficient.
Had Whirpool been able to establish that Mr. Poole had been made aware of the policy on bonuses and, in a perfect world, had he agreed in writing to those terms, it is very likely that the Court would have concluded that he was not entitled to bonus payments during the notice period.

How to Implement an Employment Contract?

The easiest time to institute an employment contract is at the beginning of the employment relationship. But it may be possible to bring a contract into an existing relationship at a later date. Here are a few tips on how to introduce employment contracts to new and existing employees. The suggestions are necessarily generalized and may not be appropriate in every situation. When in doubt, legal advice is recommended.

Employment contracts at the start of the employment relationship

The candidate should be given a written copy of the offer and advised to take it away to consider and obtain advice, legal or otherwise, before signing the contract. He or she should not be allowed to sign the contract at the meeting.
The candidate should receive the applicable policy manual and be told to read all the documents prior to the first day of work.
The signed contract and an acknowledgement that the employee has read and will be governed by the policy manual should be collected before the employee starts work on the first day.
Failure to obtain the written employment contract prior to the start of employment may result in the terms of the written contract being unenforceable.
Introducing employment contracts for existing employees

An employer generally cannot insist that existing employees sign a written contract without providing the employees with new consideration for signing the contract. Quite innocently the employer may be altering rights the employee has gained through tenure and if challenged, the courts may find the contract unenforceable. With significant unilateral changes to the employment contract, an employer runs the risk that an employee may commence an action for constructive dismissal.

The following are situations which create an opportunity for the employer to implement a written employment contract for an existing employee:
the employee is being offered a promotion
the employee is being offered an increase in remuneration
the employee is being offered a discretionary bonus payment that they otherwise would not receive
The offer of an additional payment or promotion should be made conditional on the execution of a written employment contract. Similar to the implementation of a written employment contract for a new hire, a specific process should be followed when implementing written contracts for existing employees:
the employment contract should be presented to and reviewed with the employee in advance to allow him/her sufficient time to review it and obtain independent legal advice;
the existing employee should not be allowed to sign the contract at the time the contract is initially presented
the employee should be given a date by which the contract must be signed and returned; and
the employee should not commence the new position, receive increased remuneration or the additional bonus payment prior to the contract being signed and returned.
Where an employee refuses to sign the new contract the employer has the right to not implement the promotion, salary increase or discretionary payment. An employer can also make a decision to provide employees with working notice of termination for failure to sign an employment agreement (with possible ESA severance obligations at the end of the working notice period) where an employer has made a determination that all employees must be governed by employment contracts.
Implementing a new employment contract with existing employees is very tricky. We recommend that an employer obtain legal advice both in respect of the contents of the proposed new contract and the method of implementation.