Ask any executive today and they will most likely tell you that a ‘safe’ executive position is a no doubt a thing of the past and that unfortunately, there is a shelf life with most directors, executives and CEO’s unless that particular executive is performing spectacularly.
Since 2003 our Hamilton Employment Lawyers have aggressively represented executives all over Ontario in relation to their termination. When executives are terminated, there are different factors that must be examined compared to termination packages of non-executives, particularly since executive employment compensation is structured much differently. Executive compensation in Ontario is, in our experience, often comprised of cash-based compensation and equity based compensation.
Cash-based compensation refers to payment of cash in exchange for time worked or a task completed by the executive (i.e., salary, wages, bonuses, sums attached to project milestones, etc.). One of the concerns in offering cash-based compensation is the tax treatment that compensation will receive – and how that compensation is treated upon that executive’s termination. Cash-based compensation is also subject to Canada Pension Plan (CPP) contributions, Employment Insurance premiums and other payroll taxes in Ontario.
Equity based compensation is normally in the form of a stock option plan. Stock option plans grant executives a right to acquire securities of the company at a specified exercise price. Stock option plans are common components of executive compensation in both public and private companies. The most important option plan terms are conditions regarding vesting and exercise of the options. A stock option can be exercised by an executive once the conditions attached to the award have been met. Once the conditions are met, the stock option is considered to be “vested”.
Regardless of the type of executive compensation plan agreed to, the executive’s entitlements upon termination of his or her employment are normally heavily negotiated in the employment contract or into a plan of documents incorporated into that executive’s contract – but unfortunately, contractual provisions addressing termination entitlements are not always clearly or carefully drafted and communicated. They are often the subject of complications and often times, legal proceedings, following termination of the executive’s employment.
As Hamilton employment lawyers, we are concerned with any and all provisions addressing the executive’s entitlements upon termination without cause. In the absence of a clearly written contract addressing the executive’s entitlements upon termination, executives are entitled at common law to reasonable notice upon termination without cause, which can amount to a period of many months or, in some cases, years. During this period of notice, the executive is entitled to continue to participate in any compensation plan he was entitled to participate in during his or her employment, or to receive payment in lieu of that participation, for a period equivalent to the notice period.
If you are an executive that’s been terminated, it’s important that our have our Hamilton employment lawyers review both the circumstances of your termination and your original contractual entitlement. An executive’s entitlement to participate in compensation plans during the reasonable notice period can be limited by clear contractual language to the contrary.
In every non-unionized employment relationship, the employer has an implied common law obligation to give an employee reasonable notice of its intention to terminate the employment relationship, unless there is just cause for termination.
If the employer fails to give the employee reasonable notice of termination, the employee can bring a wrongful dismissal action for breach of that implied term.
Absolutely, regardless of the type of executive compensation plan agreed to, the executive’s entitlements upon termination of his employment should be addressed in the employment contract or in plan documents incorporated into that contract.
Constructive dismissal occurs when the employer acts in a way that demonstrates that it no longer wishes to be bound to the employment relationship or the employer breaches a fundamental term of the employment contract.
In particular, careful attention should be given to provisions addressing the executive’s entitlements upon termination without cause. In the absence of a written contract addressing the employee’s entitlements upon termination, employees are entitled at common law to reasonable notice upon termination without cause, which can amount to a period of many months or, in some cases, years.
There are two steps to determining the employer’s liability for reasonable notice:
First, determine the period of reasonable notice. There is no definitive catalog or list that will guide in assessing reasonable notice in a particular case. The most important considerations are the Bardal factors, however, other factors may also be considered.
Second, calculate the executive’s damages based upon the reasonable notice period. Reasonable notice damages are usually calculated on the basis of the employee’s compensation per month, multiplied by the number of months of reasonable notice. There may be deductions from the damages for mitigation income and collateral benefits.
Our Hamilton employment lawyer are based in Hamilton and represent executives all over Ontario. We have represented executives from areas such as Oakville, Burlington, Toronto, Mississauga, Niagara Falls, Ottawa, Sudbury, Oshawa and London. The majority of the executives that our Hamilton employment lawyers represent are based in Southern Ontario, but we are able to assist no matter where you are located.
Executives may be entitled to significant termination entitlements, but in most circumstances, their contracts typically limit the types of termination that will trigger compensation. These arrangements are sometimes referred to as “good leaver” and “bad leaver” provisions, though those terms are typically not used directly in the written agreement. Instead, agreements elaborate on a variety of circumstances in which employment might end and describe the executive’s termination entitlements in those events.
Good-leaver provisions – generally provide for greater termination entitlements where the executive departs through no fault of their own, including through:
Bad-leaver provisions – generally provide for lesser or no termination entitlements where employment ends due to the executive’s actions, including through:
The parties may agree to varying termination entitlements for any of these scenarios, so it is important to closely examine the circumstances of the termination and the wording of relevant documents. Where there are no enforceable agreements on an executive’s termination entitlements, common law and statutory rules will apply.
A termination initiated by the employer that is not for just cause is a termination without cause. On a termination without cause the executive is entitled to:
Minimum statutory notice pay – In Ontario, after 3 months of service, executives are to be paid 1 week’s termination pay per year of service, up to 8 weeks.
Severance pay – In Ontario, under certain conditions, employers must pay severance pay to executives terminated without just cause. Severance pay cannot be provided as working notice and must be paid if the executive meets eligibility requirements.
Payment in lieu of notice – In addition, an employer who dismisses an executive in Ontario without just cause is obliged to provide the executive with advance working notice of termination as required by common law or the notice or payment in lieu of notice agreed to in the executive’s employment contract, which in most circumstances, is heavily negotiated. If required notice is not provided for in the executive’s contract, the executive may claim damages for the compensation that would have been earned during the notice period (“notice damages”). Disagreement over the scope of notice damages is a common source of litigation between employers and departing executives during executive terminations.
At common law, an executive’s termination entitlements are different depending on whether the employment contract is one of fixed or indefinite term. Under a fixed-term contract (one with a defined end date), the damages an executive is entitled to upon termination are compensation for the remainder of the unexpired term, rather than common law reasonable notice. The parties may agree otherwise in the contract.
A termination without cause is a typical “good leaver” scenario. To avoid disputes over notice damages, employers and executives often agree in advance on an executive’s termination entitlements. These without cause provisions are often the most detailed termination provisions in the employment agreement because they review each type of compensation the executive is entitled to and define its treatment either upon the termination date or through the notice period. Compensation issues that may be addressed include:
Registered Pension Plans
An executive’s pension rights following termination depend on a number of issues, including whether the executive was terminated for just cause, if the executive was not terminated for just cause, the length of any notice period and the length of vesting and accrual periods under the plan.
The value of the employer’s contributions toward the employee’s pension may need to be calculated for the notice period. The employer must determine if pension entitlement has vested. If so, it must determine what losses the employee’s pension value will suffer if the employer ceases contributions during the notice period. The executive’s pension losses will depend on whether the plan is based on defined benefits or defined contributions.
Retirement Plans and Allowances
Several varieties of retirement plans are used to provide executives with compensation after termination. These plans may be structured to provide post-employment compensation beyond those funded by registered pension plans. These include supplemental employee retirement plans, retirement compensation arrangements and retiring allowances.
Counsel should determine whether such a plan has been agreed to with the executive and whether the plan is fully funded or secured by a letter of credit, whether defined events such as early termination or change of control trigger lump-sum payments or accelerated payments under the plan, the tax implications for the executive when funds are paid.
Is your employer alleging cause? At common law, employers may terminate executives for just cause following serious misconduct or neglect by the executive that fundamentally undermines the employment relationship. Executive employment contracts often expand on the common law grounds for just cause. While these additional grounds may still amount to just cause at common law if they are not included in the employment contract, employers may include them for additional certainty and to identify issues that are key to carrying out the particular executive role. Some examples of actions or omissions on behalf of an executive that may constitute executive just cause termination are:
Just cause is a simple bad leaver scenario. The executive is not owed common law reasonable notice, and typically is not owed minimum statutory notice or severance pay. Aside from compensation already earned at the date of termination, the executive typically would not be owed further compensation unless the parties have contracted otherwise. Executives usually forfeit unvested entitlements to bonuses and equity compensation. Just cause can be difficult to prove, and a strong case is needed before alleging it. Failure to prove just cause will result in the termination being considered a termination without cause and may lead to claims for aggravated or punitive damages. If you are an executive that has terminated for cause, call us today at 905-333-8888 to discuss your particular situation.
Constructive dismissal occurs when the employer conducts itself in a way that shows it no longer intends to be bound by the employment contract. In these circumstances, the executive has the option to treat employment as at an end, resign and claim damages for wrongful dismissal (that is, a termination without cause and without required notice or pay in lieu). Constructive dismissal scenarios that might arise in an executive context include:
In an executive employment contract the parties may anticipate the possibility of constructive dismissal by agreeing on circumstances under which the executive may terminate for “good reason” and still be considered a good leaver (i.e. entitled to contractual termination entitlements). A good reason termination clause helps to structure disputes over changes to the executive’s employment conditions or compensation. Such a clause typically describes:
Where the employment contract does not describe how termination entitlements are to be paid, there are three principal methods of satisfying any amounts owed to the executive under contract or common law, or negotiated by the parties:
Working notice – the employer provides advance working notice of termination and continues compensation during this period. This method saves the cost of a replacing the executive during the notice period, but the employer may no longer want the executive in the workplace. Also, working notice is not credited toward statutory severance pay obligations in Ontario.
Lump-sum payment – the executive leaves the workplace immediately, and the employer provides the executive with a lump-sum payment representing all termination entitlements owed under the employment contract or that would have been required during the notice period. This method provides finality and may be more attractive to an executive who wants termination entitlements immediately with no clawback if a new position is found. The employer loses the benefit of potential mitigation.
Salary continuance (with or without a “clawback”) – the executive leaves the workplace immediately, and the employer continues to provide compensation through the required notice period or an otherwise agreed period. If the executive finds new employment in mitigation of losses, a clawback provision lowers or eliminates remaining payments owed. This method allows the employer to take advantage of potential mitigation earnings if the executive finds a new position. This method is less attractive to the executive and draws out the relationship between the parties.
The employer might use only a single method or a combination of methods to maximize the value and appeal of the package to both parties.
Executives will have an obligation to mitigate (to reduce losses by making efforts to find new employment) if the executive is entitled to common law reasonable notice damages; contractual termination entitlements are expressly subject to the obligation to mitigate or the parties have negotiated a termination package that includes a mitigation requirement.
Where the obligation to mitigate exists, the executive must make reasonable efforts to find comparable employment. The sort of employment that is comparable will depend both on the duties and prominence of the position and on the compensation it provides the executive. For executive employees, there may be fewer comparable positions available, and the chances of mitigation may be low.
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If you are an executive who has been terminated it’s important that you speak to our Hamilton executive termination lawyers as soon as possible. In addition to the above, other things much be dealt with, such as drafting an appropriate release of claims, limiting publicity of the circumstances of your departure, dealing with non-competition or non-solicitation agreements, dealing with equity rights and determining when the actual termination will take place and whether key projects need to be completed.
We must also ensure that your package offered (should at minimum) at least satisfy the minimum amounts that you are entitled to receive under statute and contract. In a golden parachute scenario, your compensation may already be exhaustively defined. If your employer tries to depart from these entitlements (for example, by denying you a bonus payment, by altering the terms of an equity award, or by alleging just cause and denying compensation outright) then there may be a significant risk of litigation.
It’s also important to ensure favorable tax structuring of your termination package, for example:
No one ever expects to be wrongfully terminated – but when it does happen, and executive wrongful termination can no doubt raise a substantial number of questions and issues that need to be considered in deciding the best way to proceed. If you’re an executive that’s been terminated, it’s important that you seek legal assistance.
Being prepared and rapidly assimilating the legal landscape is no doubt the first step in negotiating a better termination package. If you are a CEO or director that’s been terminated, your board leader managing the termination has probably already prepared a crisis management team consisting of outside employment counsel, a PR professional and trusted members of management to determine how to best handle your termination – and you should be prepared as well.
If you’re an executive that’s been terminated, call our Hamilton employment lawyers today to help prepare you in understanding your executive entitlements. You can reach us by calling us at 1-844-LALANDE no matter where you are in Ontario, or local in the Hamilton/GTA/Niagara area at 905-333-8888. You can also contact through our website our contact form and someone from our office will get right back to you.
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