Court of appeal ruling highlights language in incentive plans
The Ontario Court of Appeal has ruled that a strict examination of the language of an incentive plan is the key to determining whether a terminated employee is entitled to damages for a lost opportunity to earn incentive plan compensation during the reasonable notice period.
“If there’s something in the language that clearly entitles the employer to terminate the plan unilaterally, the terminated employee would not have earned anything after the plan’s termination even if he had been on the job,” says Monty Verlint, a lawyer at employment law boutique Littler LLP.
The issue arose when James Manastersky, an employee with 13 years of service, sued the Royal Bank of Canada’s brokerage services brand, RBC Dominion Securities, for wrongful dismissal after he turned down a termination offer.
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Manastersky joined the bank in 2001 as director of a mezzanine fund. From 2004 to 2014, he participated in a specific incentive compensation plan that depended on the performance of the fund.
In mid-2013, RBC Dominion Securities told Manastersky it was reconsidering its investment in the fund. The following February, he was terminated without cause and offered his base salary, bonus payments and benefits for 13 months. Manastersky turned down the offer and sued for wrongful dismissal.
In June 2014, the employer terminated the fund, which subsequently terminated the compensation plan. But in the 13 months following Manastersky’s termination, he was paid his base salary, his bonus entitlement for the notice period and his benefits. He also received his full share of the profits realized on the disposition of the funds.
At trial, Manastersky argued that by terminating the funds and the plan, RBC Dominion Services had deprived him of the opportunity to earn incentive payments during the notice period. The trial judge, who ruled that Manastersky was entitled to 18 months of notice, also awarded $953,000 to compensate him for that lost opportunity over the notice period.
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But a majority of the Court of Appeal, while upholding the 18 months’ notice period, ruled that the award for lost opportunity to earn incentive payments was improper.
The court reasoned the incentive plan was the product of an agreement between a sophisticated employer and a group of sophisticated employees, the terms of which had been fully disclosed to Manastersky at the time he signed the plan. The plan provided that an employee’s plan status in any given investment period “shall not give any participant the express or implied right” to any future participation in the plan. It also gave the employer the right to “terminate the plan effective as of the end of any investment period.”
Accordingly, when RBC Dominion Services terminated the plan in June 2014, Manastersky’s rights under the plan also came to an end. “By terminating the [incentive compensation plan], RBCDS was not evincing an intention not to be bound by the employment contract,” the court wrote. “On the contrary, it was exercising a fully disclosed right it had under the contract of employment.”
Shana French, a lawyer at Sherrard Kuzz LLP, says the decision recognizes the “commercial element” of the relationship and the parties’ sophistication.
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“The majority judges’ emphasized that Manastersky was hired with full knowledge of the plan, signed the plan and any amendments to it and also received advance notice of the termination. So in ruling that the employee was stuck with having agreed to a plan that provided termination without notice, the majority honours the clear terms of the plan, as opposed to imposing an equitable approach.”
Still, the decision doesn’t seem to have effected much clarification of the law. “Ultimately, this area of law is all over the place, with decisions turning on distinctions without a difference that are treated as ambiguities in the contract,” says French.
For his part, Verlint, who calls the decision “somewhat surprising” in the light of earlier jurisprudence, says the ruling is “pretty good” for employers.
“They should try to include language similar to what existed in this case if their aim is to disentitle employees to bonuses or incentives following their termination,” he says.
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