When assessing what type of termination package to offer an employee or what the employer’s liability for damages is, non-salary compensation can become an issue. Typically, this compensation may include stock options, stock grants and bonuses. If not resolved at termination (or shortly thereafter) a determination of “qualification” or “what it’s worth” can contribute to prolonged and protracted issues between parties. You can guess what that means. This article discusses what you need to know to provide a fair and reasonable termination package when it comes to non-salary compensation.
Upon termination, employees will be entitled to compensation for bonuses they would have earned during the reasonable notice period if there is a bonus structure worked into the employee’s contract and/or if the bonus can be said to be an integral part of the employee’s remuneration package. Even if it is not expressly agreed between the employee and the employer that a bonus is to be paid, if it becomes an integral part of the employee’s remuneration, the payment of a bonus will typically be deemed by the court as a right vesting to the employee.
Alternatively, if a bonus is rendered as a “gratuitous offering”, discretionary and not an integral or contractual component of the remuneration package, it may not need to be included in the employee’s termination package.
Courts will be more inclined to determine that a bonus forms an integral part of the employee’s compensation, notwithstanding a “discretionary” label, if:
- The bonus has been paid regularly over a number of years.
- The size of the bonus is significant, considering the employee’s overall income.
- The bonus would have been awarded had the employee continued to work for the employer.
- The bonus was meant as a reward for past service rather than an incentive for future service.
- Non-terminated employees of similar status receive the “discretionary” bonus.
- A bonus plan is formula based or is a form of profit sharing (rather than based on subjective criteria and performance based).
In the event of a wrongful termination, the amount of bonus to be awarded in damages is determined generally by the company’s formula, comparing the bonuses received by the other employees and/or verifying the employee’s bonuses for the previous years. Such methods are also useful in quantifying the amount owing to an employee at termination to avoid a wrongful dismissal claim.
Generally, stock options are exercised during the period of employment. However, courts have often classified stock option plans as benefits and have recognized the employer’s obligation to continue to allow stock options to vest over the duration of the period for which he or she would have been entitled to notice of termination. Furthermore, a terminated employee is entitled to exercise all vested options until the end of the notice period.
A payment in lieu of notice or salary continuance does not, as with other types of employee benefits, extinguish the right to stock option benefits during the period of reasonable notice. However, where the employer has a stock option plan in effect which clearly indicates that options end when an employee is advised of the termination of their employment, the wording of the plan may govern, provided the relevant wording is clear, unambiguous and fair.
In wrongful termination claims, courts will assess damages for stock options by determining what probably would have happened and what is reasonable in the circumstances, but for the wrongful termination of the options. Such an analysis may include the past trading and selling history of the dismissed employee. Liability for such damages can be avoided by continuing an employee’s options during the reasonable notice period or contracting out of such obligations in the wording of the stock option plan.
What this means to you
Incentive compensation, such as bonuses and stock options, will be treated like any other form of remuneration in a claim for damages for wrongful dismissal. Therefore, absent unambiguous contractual language that clearly disentitles employees to benefits during the period of reasonable notice, reasonable termination packages should ensure that benefits are continued during the reasonable notice period and/or that employees are compensated for the value of the benefits they would otherwise be entitled to during the reasonable notice period.
The treatment by the courts of this non-salary compensation to terminated employees often underscores the importance of carefully worded employment contracts that will, to some degree, take the unknown out of the equation and will lead to less litigation risk.