A recent decision of an Alberta trial judge in Styles vs. Alberta Investment Management Corporation may be a game changer for employees when it comes to collecting incentive based pay after dismissal.
Most incentive plans (bonuses, stock options, and restricted share units) include restrictive language often requiring that employees be actively employed to be eligible for payment.
This often leads to employees missing out on significant payouts where employment is terminated prior to the payout or vesting of these forms of compensation under various long-term incentive programs.
In the Styles decision the employee was terminated prior to the payout (vesting) of grants under a long-term incentive plan (LTIP) depriving him of hundreds of thousands of dollars in compensation which he claimed he had earned.
The stated purpose of the LTIP was to enhance the employer’s ability to attract and retain key talent. The plaintiff commenced work on June 15, 2010. He was terminated from employment June 11, 2013. Notwithstanding consistently positive performance review and attainment of stated objectives Alberta Investment Management refused to pay him any of the accrued value of his annual LTIP grants stating that he was not eligible for a payout under the terms of the plan as none of the grants had vested as of the date of his termination.
While our courts have affirmed that employment contracts are one of the classes of contract where an applied term of good faith has been found to exist, the Supreme Court of Canada recently created a stir when it created a new common law duty of honesty in contractual performance (Bhasin v. Hyrnew).
Building on the Bhasin decision the judge in Styles found there was a common law duty requiring that discretionary powers granted under a contract be exercised fairly and reasonably and not in a manner that is capricious or arbitrary.
In Styles, the judge found that Alberta Investment Management acted in a capricious and arbitrary manner when it exercised its discretionary contractual power to terminate employment and deny payment of any LTIP grants, thereby breaching its common law duty.
The judge went on to state that the conduct by the employer breached the Supreme Court of Canada’s direction that “contracting parties must be able to rely on a minimum standard of honesty from their contracting partner in relation to performing their contract as a reassurance if the contract does not work out they will have a fair opportunity to protect their interest”.
No such opportunity was afforded to Styles. The defendant denied any payment under the LTIP. The court found the defendant to be in breach of its obligations and awarded over $440,000.00 in damages to Styles. This is an important case not only because it ushers in a new judicial approach to these issues in its application of the principles in Bhasin but also because in quantifying Styles` damages the judge was prepared to award damages on a prorated basis on grants that would not have vested until a couple years after his dismissal.