In 2018, an employee was terminated by his employer without cause following a tenure of nearly 23 years. In addition to his base salary, the employee’s compensation included performance-based cash bonuses and stock awards, which collectively accounted for approximately 30% of his income. The stock awards in question were awarded to the employee during his employment but would not have vested until after his employment was terminated, during the reasonable notice period.  When the employee was terminated, he was not paid his cash bonus for the 2018 fiscal year and his unvested stock awards were cancelled.

The Stock Awards Agreement included the following clause: “in the event of termination of Awardee’s Continuous Status as Participant, Awardee’s rights under this Award Agreement in any unvested stock awards shall terminate. … Awardee’s Continuous Status as a Participant will be considered terminated as of the date Awardee no longer is actively providing services to the Company.”

The Ontario Superior Court was asked to consider, among other things, whether the employee was entitled to receive his cash bonus for the 2018 fiscal year and throughout the reasonable notice period and whether the employee was entitled to his awarded but unvested stock awards.    

Stock Awards

It was not disputed that stock awards formed an integral part of the employee’s compensation package.  However, the issue before the court was whether the employee was entitled to the the stock awards that would have vested after the termination date, but during the reasonable notice period (of almost 24 months).  The language contained in the Stock Awards Agreement stated that any unvested stock awards terminated immediately.  However, the court ultimately determined that the termination language was unenforceable and awarded damages to the employee.   

In arriving at its conclusion, the court determined that the employer had not taken “reasonable measures” to draw the employee’s attention to the relevant termination language in the lengthy stock award agreement.  The employee testified that he had not read the entire agreement and was not aware of the provisions which would have disentitled him to unvested stock awards in the event of termination.  

While the employee received email notifications with a link to the stock award agreement that he was required to accept in order to accept a stock award, the court decided that this was not a “reasonable measure” to bring the relevant language to the employee’s attention, in particular since the stock awards constituted an integral part of the employee’s compensation.  Further, the court concluded that the termination language was “harsh and oppressive.” Specifically, “harsh and oppressive” terms must be drawn to the employee’s attention in order for them to be enforceable.  As a result, the termination provisions were found to be unenforceable and the employee was entitled to damages in lieu of the awarded but unvested stock awards.

Performance Bonus

The court determined that it is settled law that performance-based awards, while discretionary, must nonetheless be conferred in a “fair and reasonable” manner. The employee argued that the process was unfair, but the court found that the employer’s decision was reasonable. Accordingly, the employee was not entitled to any damages as a result of being denied his performance bonus for the 2018 fiscal year.  However, the employee was entitled to a payment in lieu of performance throughout the common law reasonable notice period. 

Implications for Employers

Employers who wish to include (or introduce) termination clauses in employee stock award programs should ensure that reasonable measures (above and beyond email notifications) are taken to draw the language to the employees’ attention to increase the likelihood that these “harsh and oppressive” clauses will be enforceable.

Finally, if a performance-based cash bonus program is available to employees, employers should ensure that the process is fair and the bonus decisions are reasonable.

Further Reading

• Battiston v. Microsoft Canada Inc., 2020 ONSC 4286 (CanLII)
• What’s Hot on CanLII (Slaw: Canada’s online legal magazine)

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”