‘They're thinking about what's going to go right, not what's going to go wrong’: Alberta lawyer discusses common employer blind spots in termination clauses
A recent Alberta Court of King’s Bench decision on a wrongfully dismissed executive’s claim to shares is a perfect example of how airtight bonus and long-term incentive plans need to be if employers want to limit payout upon termination.
According to Adrian Elmslie, partner at Reynolds Mirth Richards & Farmer in Edmonton, McElgunn v Vermilion Energy Inc. makes the expectation clear: “Any kind of ambiguity that exists within the language is going to be read against the employer, almost invariably.”
In the McElgunn case, the court found on appeal that since the share plan’s early termination clause didn’t exactly outline what would happen if a vestment payout was scheduled during a reasonable notice period, the clause did not adequately cover the “exact circumstances” of the employee’s termination.
Therefore, the clause language did not “absolutely clearly and unambiguously” remove her right to that share award.
Long-term and unilateral contract risks
As Elmslie explains, bonus and share incentive plans are particular areas of risk for employers, because they’re designed with long-term retention in mind and often without enough thought to the end of the relationship.
“Sometimes there's a reluctance to specifically state that ‘We are limiting or taking away your common law rights upon termination.’ It’s not often a ‘look’ the employer wants to have,” Elmslie says.
“They're forming relationships with employees, particularly higher-level employees that are going to be participating in these schemes. They're thinking about what's going to go right, not what's going to go wrong.”
Bonus and share plans are typically “unilateral” or take-it-or-leave-it agreements – conditions which can bring into sharp relief the advantage an employer has when making such deals.
“When you have a take-it-or-leave-it kind of agreement, the standard that the employer is going to be held to is going to be even higher, and it's going to highlight that power imbalance,” says Elmslie.
“Because that's the only way the employee can get access to this bonus plan, is to agree to whatever terms that the employer puts in front of them.”
Aligning contracts, plans and jurisdictions
Another important consideration for employers and HR leaders is ensuring that employment agreements and incentive plans reflect Canadian law, Elmslie says, pointing out that many employers rely on template documents drafted outside the country, particularly for share-based compensation.
“If those documents are U.S.-based, they don't have the same kinds of concepts of common law rights upon termination,” says Elmslie.
“From a U.S. perspective, and from the share plan perspective, they're covered, but in a Canadian perspective, they're not. So, you have to be careful that you're not just using language from another jurisdiction … you have to make sure that you double check that those clauses are enforceable.”
Elmslie notes that high expectations make ongoing legal review a key part of administering bonus and share plans – especially since incentive plans are often renewed each year; as plans and contracts are amended or changed annually, terms can drift away from what was originally vetted, unintentionally introducing ambiguity where before there was none.
The bottom line, he says, is that courts will demand clarity.
“What you want to have is certainty one way or the other. You want to be very clear about what is going to happen upon termination. That's really what the cases are trying to get to,” Elmslie says.
“Because [employers] control the drafting process … the default is always going to be in favour of the employee. So, if you're an employer trying to protect your interests, you have to make sure that you're very, very clear with the employee about what is going to happen when termination occurs.”
