Ontario Court: Terminated Employee Entitled to Bonus Deferrals

The Court of Appeal recently found that a terminated employee was entitled to deferred portions of his bonus, that would have vested after the end of his reasonable notice period, upon termination.

What Happened?

The employee in question was an investment banker and Managing Director and Head of the Canadian branch of Mergers & Acquisitions at UBS Securities Canada Inc. (UBS). He was fired, without cause, in February 2013 due to the closure of the bank’s Canadian M & A branch.

The employee sued for wrongful dismissal, requesting damages for breach of contract. A trial judge awarded him 18 months’ notice as well as damages. The trial judge further found that the employee’s annual bonus was an integral part of his compensation, and that the employee was entitled to damages for the loss of the cash portion of his bonus for 2012, as well as the cash bonus he would have earned if his employment had continued during the reasonable notice period.

UBS appealed the decision. The main issue on appeal was whether the trial judge had erred in awarding the employee damages that covered the loss of the deferred portions of his annual bonus, which would have vested after the expiration of the notice period, and which was valued at approximately $1.2 million.

The Deferred Portion of the Employee’s Bonus

The employee had, at all relevant times, earned an annual compensation consisting of both a salary and an annual bonus. For the first eight years of his employment, the employee’s bonus was paid entirely in cash. From 2008 onwards, if the annual bonus amount exceeded 250,000 Swiss francs, 40% was paid in cash, and the other 60% was payed through “notional shares” in UBS stock, which fluctuated, and which would vest in equal amounts over the years. This deferred portion of the employee’s bonus was paid out under UBS’ Equity Ownership Plan (EOP). The employee was not paid or allocated any deferred bonus after the decision to fire him was made.

UBS argued that the employee was not entitled to this deferred bonus for two reasons:

1. The employee was entitled to damages for lost bonus only in respect of any amount he would have received before his termination and during the notice period.
2. The wording of certain provisions of the EOP excluded the deferred portion of the employee’s bonus from his damages.

The Court of Appeal did not accept these arguments.

Employee Entitled to Only the Amount of Bonus Received During the Notice Period

The Court noted that a previous appellate decision, had outlined a two-part test that was relevant in this situation. In order to determine whether a terminated employee is entitled to damages for a lost bonus, the court must determine whether that employee has a common law right to damages for breach of contract that would include compensation for a lost bonus. The court must then consider whether there is language in the bonus plan that “unambiguously alters or removes” this common law entitlement.

Applying this test to the matter at hand, the Court of Appeal noted that if the employee had remained employed during the reasonable notice period, he would have been awarded his bonus. With respect to UBS’ argument that he was only entitled to what he would have received during the notice period, and no deferred amounts, the Court recognized the employee’s contractual right to receive compensation that included a bonus in the event of termination without cause, based on language in his letter of hire.

The letter of hire stated that the employee would receive “not less than six (6) months’ notice or compensation in lieu thereof” and that “for further clarity, the amount of equivalent compensation [would] be determined by reference to salary and bonuses”.

The employee’s termination letter offered to pay him $495,133 as the equivalent of 14 months’ notice, which included the average of his total compensation for the prior two years.

Despite its own contractual documents, UBS argued that it was not required to pay the employee any compensation for the deferred portion of any bonus, even though the deferred portion would have been earned by the employee during his employment and during the reasonable notice period. The Court of Appeal noted that this was “contrary to settled law”, since it has been recognized that:

where an employer terminates an employee without cause, the employer is liable for damages for breach of contract, measured by the loss of wages or salary and other benefits that would have been earned during the reasonable notice period [emphasis added].

The Court also pointed out that:

…damages for wrongful dismissal may include an amount for a bonus the employee would have received had he continued in his employment during the notice period, or damages for the lost opportunity to earn a bonus. [emphasis added].

In this case, while the employee’s notional shares would not have vested prior to the end of the reasonable notice period, there was “no question” that the bonus had been “earned” by the employee during the notice period.

Contractual Language Prohibited Paying the Terminated Employee a Deferred Bonus

The Court of Appeal did not agree that certain sections of the EOP and clauses in the EOP’s Common Terms unambiguously altered or removed the employee’s entitlement to his bonus, per the second part of the relevant test.

The language in those sections or clauses did not disentitle a terminated employee from having a deferred portion of their bonus included as part of a wrongful dismissal award. A requirement that an employee be employed in order to receive a bonus “does not prevent the [employee] from receiving, as part of his wrongful dismissal damages, compensation for the bonuses he would have received had his employment continued during the period of reasonable notice”.

While section 7.1.6 of the EOP excludes a claim in respect of an exercise of discretion by UBS, and section 7.1.7 of the EOP excludes an employee’s “right to compensation for a loss in relation to a plan”, the employee’s claim in this case was not for compensation for either of those things. Neither of the disputed provisions clearly disentitled the employee to a right to damages for his lost deferred bonus on termination, which, per the terms of his employment contract, he was entitled to expect.

The court noted that such a conclusion is further bolstered by s. 5.2 of the EOP which states that unvested awards will not be forfeited and will continue to vest in accordance with the terms of the EOP. The court concluded that that the trial judge had reasonably found that the employee had been awarded a bonus in 2013 (for his performance in 2012), and that bonus included stock options that would have vested in the future and which would have continued to vest and would not have been forfeited.

The Court of Appeal concluded that the original trial judge had not erred in including the deferred portions of the bonus in the damages award.

The appeal was dismissed, and the employee was awarded $25,000 in costs.

Lessons Learned for Employers

It is imperative for employers to have carefully drafted and regularly reviewed employment contracts and related agreements in place for all employees. A well-written contract that has been reviewed by a knowledgeable employment lawyer can provide greater certainty and work to limit potential risk and liability.

At Sultan Lawyers, our employment lawyers will review, draft, and negotiate employment agreements on your behalf. Where necessary, we will represent you in any disputes arising from those agreements.  Contact us online or at 416.214.5111 for a consultation.

Lessons Learned for Employees

Employees are often provided with various forms of compensation above and beyond their base salary. This can mean that a salary will represent only a minor part of an employee’s total pay. This is generally laid out in your employment contract or executive employment agreement. Disputes may arise over bonuses at any stage of your employment relationship, including after termination.

At Sultan Lawyers, our employment lawyers can help you have constructive discussions and negotiations with your former employer, will allow you to understand your options, and will help you enforce your rights following a termination.  When you are our client, you can count on our persistence in achieving the best results, getting you maximum compensation (including compensation for any bonuses or other amounts you may be entitled to) and making sure you are protected if you have been terminated. Let us review your termination package or severance package, negotiate with your employer, and represent you in any related disputes. Contact us online or at 416.214.5111 for a consultation.