Eliminating employee stock options

Does getting rid of employee stock options constitute constructive dismissal?

Stuart Rudner
Question: A regional president plans to eliminate stock options for two levels of employees who have received options on a consistent, annual basis in the past (these options are worth about 10 per cent of the employees' total compensation package). He plans to award them this year's grant and then tell them they won’t be receiving grants in the future. Besides the obvious morale issues this could create, I’m concerned this could be deemed constructive dismissal. Is this indeed the case and, if so, how much notice must be given?

Answer: You are right to be concerned, on both counts. A change like this can have a profound effect on morale and be seen as a change in the corporate culture. If you do proceed as planned, efforts should be made to counter the inevitable negative reaction in order to avoid a backlash that could lead to the loss of valued employees and difficulty attracting the top talent in your area.

On the legal front, constructive dismissal is a sometimes misunderstood concept. At a general level, constructive dismissal occurs when one party unilaterally changes a fundamental term of the employment relationship without providing proper notice of the change. As you can see, there are three key elements to this concept: a unilateral change to a fundamental term, without notice.

Unfortunately, very few employment agreements specifically designate which of their terms are fundamental. To use an example from a previous Canadian Employment Law Today article, changing the location of an employee's desk is unlikely to support a finding of constructive dismissal. However, even that example must be used with a caveat. If the new desk somehow prevents the employee from carrying out her duties properly, or results in a loss of reputation within the organization, then it is arguable it would constitute constructive dismissal. To go even further, if the new desk were located in the kitchen or washroom, the conclusion would be different. As in other areas of law, each case is fact-specific.

Among other things, the following can constitute constructive dismissal:
• a change in the method of calculating remuneration with a resulting significant reduction;
• a demotion;
• significant geographic relocation of the employee's work base;
• failure to protect an employee from harassment.

However, even dramatic changes will not be considered constructive dismissal if the employer has the right, either explicitly or implicitly, to make the change or has given sufficient notice of the change. That last point is important. Often, the least expensive way to impose change while minimizing exposure is to provide reasonable notice and thus eliminate one of the criteria for a finding of constructive dismissal: a lack of notice. For relocation, a notice such as: “Effective Jan. 1, 2010, your office will be relocated to Montreal.”

The amount of notice required would be the same as that required in the event of termination. This will be different for each employee as they will each have different lengths of service, different positions and be of different ages. The best approach will be to determine the longest applicable notice period, and then give all employees that amount of notice of the change (or slightly longer, to be safe). As you will realize, this can be a very long time. However, it would be short-sighted to adopt this strategy but provide an inappropriately low amount of notice.

Once an employee has been notified of the future change, she is, of course, free to seek other employment, as she would be at any time. However, if she remains in the employ of the company, it will be entitled to impose the change once the notice period has passed. If the employee chooses to leave at that point, she should be precluded from successfully bringing a claim for constructive dismissal.

Another alternative would be to offer something to the employees in exchange for their agreement to accept the elimination of the stock options. In other words, turn a unilateral change into one that is mutually agreed upon. The benefit offered to the employee is legally referred to as consideration. It can be anything of value, from a one-time bonus to an increase in salary or extra time off each year. However, bear in mind it cannot be something the employee would otherwise have received. I once had a client suggest offering a bonus to its employees in exchange for their agreement to be bound by a non-solicitation covenant. However, the bonus in question was the annual bonus they would have received in any event. I advised them to think of something else to offer.

Although I have not seen any judicial consideration of the minimum value that would be sufficient, I would advise against the loonie or toonie that some employers seem to be inclined to offer.

I note that the inherent frailty with this approach is that it requires that every employee accept. Otherwise, you may still be faced with a constructive dismissal claim on the part of those who choose not to accept the offer.

Stuart Rudner is a partner who practices commercial litigation and employment law with Miller ­Thomson LLP’s Toronto office. He can be reached at (416) 595-8672 or [email protected].

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