Entitlement to shares and vacation pay

Recent case a reminder to have properly drafted contracts to minimize costs, liability

Entitlement to shares and vacation pay
Nadia Zaman

Exclusive to Canadian HR Reporter from Rudner Law.

Vacation pay is often a confusing topic for employers and employees alike. So is the topic of variable compensation, such as an entitlement to shares, during the notice period.

In Grimaldi v. CF+D Custom Fireplace Design Inc., the court ruled on whether an employee is owed vacation pay over the reasonable notice period awarded to him, as well as an employee’s entitlement to shares of the company.

So what happened in this case?

Termination without cause

The plaintiff employee left his previous job for a position with the defendant employer as senior project manager. Less than five months later, the employee’s employment was terminated without cause and the employer provided him with two weeks’ severance pay. 

The employee sued the employer for wrongful dismissal, seeking a payment based on an entitlement to shares in the company. The employer argued the employee had not yet earned any shares during his employment and was thus not entitled to any payment.

The judge found the employee’s evidence to be inconsistent at times, while the witness for the employer was found to be “forthright and candid” in his evidence.

Share ownership in employment contract

The employment contract stated, in part:

“Effective May 1, 2017; After Corporate Accountants have crystallized share value, you are to receive annually and cumulatively 1% of company shares for 5 consecutive years of service for a total of 5% to be held in trust and only to officially transfer ownership upon the successful completion of a five-year term. Each completed year end will in addition pay out the value of accumulated share ownership at that time”.

The parties differed on the interpretation of this provision.

The court found as follows:

“I find that the meaning of clause 5 is that at the completion of each year, Mr. Grimaldi would be entitled to receive a payment equal to the value of the accumulated share ownership that Mr. Grimaldi had notionally earned to that point in time. After one year, the payment to Mr. Grimaldi would be equal to one percent of the value of CF+D. After two years, the payment to Mr. Grimaldi would be equal to two percent of the value of CF+D and so on up to five percent. In my view, this is akin to an annual bonus.

“A question remains as to when the annual payment and earned share percentage was to accrue. Although CF+D’s year end was April 30, I find that the one-year period refers to a calendar year. Mr. Grimaldi commenced employment in January 2016. As drafter of the contract, if Mr. Volpe had intended the yearly period to coincide with the year end of the company, which would require Mr. Grimaldi to work an extra three months to earn the first one percent and first annual payment, Mr. Volpe could have expressly said so. The contract does not clearly do that. The share percentage would be earned, and the annual payment would be paid out effective as at the calendar year end, based on the value established at the April 30 year end of CF+D.”

Notice period, vacation pay

The court further found that:

  • “The end of the notice period represents the end point of [the employee]’s entitlement to compensation in lieu of notice, not the end point of his employment”
  • “As of the date of his termination, he had not yet earned any shares”
  • “The language of the employment contract clearly limits [the employee]’s ability to acquire any shares until he has completed five years of employment. Mr. Grimaldi did not acquire any shares in CF+D.”

The court also found that the employee was entitled to five months and two weeks’ notice based on an assessment of all relevant factors.

The employee sought vacation pay over the reasonable notice period awarded to him. In particular, he sought vacation pay calculated at six percent of the amount of salary to the end of the notice period.

The court confirmed the generally accepted view that a dismissed employee is not entitled to vacation pay during the common law notice period:

“[101]   As in [Cronk], to award the plaintiff damages for vacation pay, on top of an award of full salary for the period of notice to which he was entitled (which necessarily includes payment of his salary for any vacation he may have taken had he worked during that notice period) is to provide double indemnity, or put another way, to provide compensation for a loss that he has not suffered.”

Key takeaways for HR

This case is a good reminder for employers to have properly drafted contracts in place, in order to maximize their rights and flexibility and minimize their costs and liability. As an example, with a properly drafted contract with an enforceable termination clause limiting the employee’s entitlements upon termination to the minimum under the statute, the employee would only be entitled to two weeks of termination pay.

Importantly, any ambiguity is typically read in favour of the employee since the employer is usually the one drafting the agreements and plans in question. Here, the clear provisions regarding the employee’s entitlement to shares helped protect the company.

Finally, it is well established that vacation pay must be paid during a statutory notice period but not the common law period. The vacation pay ruling in this case is relevant for employees who continue to be paid during their vacation time; an employer may, instead, provide an employee with vacation pay on each paycheque, in which case vacation pay may be owing to the employee.

Nadia Zaman is a senior associate at Rudner Law in Toronto. She can be reached at (416) 864-8500 or [email protected].

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