The Alberta Court of Appeal recently released its first decision of 2017, in Styles v Alberta Investment Management Corporation (AIMCo) (2017 ABCA 1). It is undoubtedly welcome news for employers.
The issue of whether a dismissed employee is entitled to bonus compensation during the period of reasonable notice has been a hot topic lately. In Styles, the Alberta Court of Appeal weighed in and concluded that:
- in the event of a without-cause termination, an employer is not obligated to provide the employee with reasons for the termination; and
- employees are not entitled to bonus pay-outs where they have not met the contractual preconditions.
The plaintiff, David Styles, was employed as an investment manager with AIMCo. AIMCo's long-term incentive plan (LTIP) provided Styles with an incentive bonus after four years of employment, as long as he was "in active employment" at the time the LTIP bonus vested.
AIMCo terminated Styles on a without-cause basis after three years of employment, before the LTIP vesting. Although AIMCo provided Styles with pay in lieu of notice, it paid no compensation in respect of the LTIP.
The lower court agreed with Styles that AIMCo had exercised its discretion in terminating him and that such discretion was required to be exercised in good faith.
Because AIMCo had not provided reasons for Styles' termination, the good-faith component was not met. Further, despite the 'active employment' precondition in the LTIP, the trial judge found that Styles was entitled to a pro-rated LTIP bonus for his three years of employment.
On appeal, the Alberta Court of Appeal reversed the lower court's decision and found in favour of AIMCo. The court confirmed that 'active employment' was a clear condition precedent in the contract. As such, the employer was not exercising discretion in not paying Styles any portion of the LTIP bonus, but simply following the terms of the contract.
Further, the court disagreed that the employer's decision to terminate the employee on a without-cause basis should be described as a 'discretion' or that the decision to terminate was subject to judicial review. Instead, the court found that the employer had a fundamental right to terminate the employment contract and, where this was done on a without-cause basis, the employer was not required to provide reasons for the termination.
The court strictly interpreted the 'good-faith' requirements set down by the Supreme Court in Bhasin v Hrynew (2014 SCC 71). While Bhasin applies to parties' conduct regarding contractual performance, the Alberta Court of Appeal stressed that these principles do not extend to contractual negotiation. Accordingly, just because the LTIP vesting provisions in Styles' employment contract were not in his favour did not mean that the court could or should step in to correct a bad bargain.
The court of appeal's decision in Styles is reassuring for employers, for the following reasons:
- Where an employment contract clearly excludes certain bonuses on termination, that agreement will bind the parties. In particular, a bonus plan can be limited to employees who are 'actively employed' on the day the bonus is awarded;
- An employer is not obligated to justify or provide reasons for a without-cause termination; and
- An employer's 'good-faith' obligations under Bhasin apply to the performance of a contract, but do not extend to its negotiation. In particular, in performing a contract, an employer is not obligated to offer an employee more favourable terms than those agreed to in the contract.
While these points are welcome news for employers, this decision also serves as a reminder of the importance of good contractual drafting. The power imbalance in employment contract negotiations means that any vague or uncertain terms will be interpreted in favour of the employee. As such, where employers want to limit payments on termination, these clauses should be clear and include all necessary definitions (eg, 'active employment') for proper interpretation.
For further information on this topic please contact Kyla Stott-Jess at Fasken Martineau DuMoulin LLP by telephone (+1 403 261 5350) or email (firstname.lastname@example.org). The Fasken Martineau website can be accessed at www.fasken.com.
This update was reprinted with permission from Northern Exposure, a blog written by lawyers in the labour, employment and human rights group at Fasken Martineau, and produced in conjunction with HRHero.com.
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