On January 4, 2017, the Alberta Court of Appeal released its first decision of the new year, in Styles v Alberta Investment Management Corporation (PDF). The case is a welcome gift for employers – it comes to a number of employer-friendly conclusions on an employer's obligations of good faith, and an employee's entitlement to bonuses (or lack thereof) in the context of without cause terminations. Most importantly, the Court found that an employer does not owe an employee reasons for termination in the event of a without cause termination, and that employees are not entitled to bonus payouts where they have not met the contractual preconditions. After an economically challenging 2016, Styles looks to be ringing in a better 2017 for employers.
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, prior to the LTIP vesting. Although AIMCo provided Styles with pay in lieu of notice, it did not pay any compensation in respect of the LTIP.
Lower Court Decision
The lower Court (PDF) 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's 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.
Court of Appeal Decision
On appeal, the Alberta Court of Appeal reversed the lower Court's decision and found in favour of AIMCo. The Court made several important findings. Firstly, it 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. Secondly, 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 (PDF). While Bhasin applies to parties' conduct in respect of 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.
Take-Away for Employers
The Court of Appeal's decision in Styles is reassuring for employers on the following important points:
- 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 all of the above points are great 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 crystal clear, and include all necessary definitions (ie: "Active Employment") for proper interpretation.