In a recent case, the Supreme Court of Canada is being asked to consider a question that has long divided courts and vexed employers: are agreements that forfeit employees’ unvested equity-based compensation on termination enforceable, even if the vesting is scheduled to occur during the reasonable notice period?
“The issue is an important one because so many companies’ compensation structures for high-level management are based on some form of equity compensation,” says Robert Stack, a lawyer at Wilson Laycraft Barristers and Solicitors. “The problem for employers and employees is that the jurisprudence is more or less equally divided on whether agreements that limit stock options and other equity rights on termination or during a notice period are enforceable.”
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Stack, who represents both employers and employees in wrongful dismissal cases, is counsel to Bruce Kirke, who worked for Spartan Controls Ltd. for 25 years before the company fired him.
Kirke sued for wrongful dismissal. The trial judge awarded him 20 months’ notice, during which period he was entitled to damages for the loss of his base pay, benefits and quarterly bonus payments.
But the trial judge ruled that Kirke couldn’t claim damages related to the loss of payments he would’ve received during the reasonable notice period as a participant in Spartan’s shareholder profit-sharing agreement. While the agreement was part of Kirke’s compensation, he couldn’t claim the payments that vested during the 20 months’ notice period (apart from the first 90 days), as he had signed a shareholder agreement separate from the employment agreement authorizing the company to buy back employee-owned shares at any time on 90 days’ notice.
Kirke appealed the trial judge’s ruling on the profit-sharing payments, but the Alberta Court of Appeal dismissed his appeal. The court reasoned the unambiguous terms of the shareholder agreement entitling the company to buy back the shares restricted Kirke’s right to that part of his compensation.
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“Damages for a contractual breach in failing to provide reasonable notice are not payable to restore a terminated employee to the position they would have been in had they not been terminated,” the court stated. “They aim to put the wrongfully terminated employee in the position they would have been in had the employer complied with its reasonable notice obligation.”
Here, the court concluded the employer’s duty to comply with its “reasonable notice obligation” included reference to the clause in the shareholder agreement that “unambiguously limited the time for which Mr. Kirke could claim the [shareholder profit-sharing agreement] entitlement.”
Kirke has applied to the Supreme Court for leave to appeal, but the high court hasn’t yet decided whether to hear the case.
“If the Court of Appeal’s decision stands, it may help employers nominally, but from a practical perspective, it will create a lot of uncertainty,” Stack says.