Limiting Language for Bonus and Stock Option Clauses – The Court of Appeal weighs in

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A recent decision from the Ontario Court of Appeal, O’Reilly v. IMAX Corp., considered whether a wrongfully dismissed employee is entitled to exercise stock options, receive bonuses or other aspects of a compensation package, such as profit-sharing, during a reasonable notice period.

This case dealt with an employee who had been employed for 22 years with IMAX Corporation when he was dismissed without cause. His compensation included base salary, commissions, group benefits, and participation in a long-term incentive plan which included stock options. During the motion for Summary Judgment, the motion judge determined that the employee was entitled to damages based on 24 months’ reasonable notice, together with all commissions. As part of the decision, the motion judge determined that the employee was also entitled to the loss of the right to exercise stock options that would have vested during the reasonable notice period.

The language pertaining to the restricted share units (RSUs) provided as follows:

In the event that the Participant’s employment with the Company terminates for any reason other than death, Disability or for Cause, the RSUs shall cease to vest and any unvested RSUs shall be cancelled immediately without consideration as of the date of such termination.

A wrongfully dismissed employee is generally entitled to compensation for the loss of contractual benefits that they would have earned during a reasonable notice period, including the loss of pension benefits, bonuses, stock options and other incentives such as profit-sharing plans.  That said, the Court has also confirmed that the terms of the contract can limit or eliminate this common law entitlement. The Court offered a very useful summary of the applicable legal principles:

  1. A wrongfully dismissed employee is entitled to damages for all wages, salary and any other benefits that would have been earning during the reasonable notice period.
  2. This principle applies to stock options, bonuses or incentives that are an integral component of the employee’s compensation.
  3. The Court will undertake a two-step analysis to determine if the loss is recoverable:
    1. First, whether there was a breach of contract and therefore, any entitlement to common law damages. Was the bonus or profit-sharing an integral component of the employee’s compensation?
    2. Second, whether the terms of the contract unambiguously alter or remove the employee’s common law entitlement.

The Court of Appeal noted that in order to be successful in displacing the common law entitlement:

  1. The plan must establish that an employee terminated without cause would have no entitlement to exercise any option rights; and
  2. The plan must specify a clear date at which point this will occur.