“Without Cause Terminations” and a Possible “Duty of Reasonable Exercise of Discretionary Powers”

January 10, 2017 | Monique Petrin Nicholson, Stephen M. Torscher

In the fall of 2015, Madam Justice Yungwirth of the Alberta Court of Queen’s Bench penned a decision that caused employers to take notice. In Styles v Alberta Investment Management Corporation, Justice Yungwirth built upon the Supreme Court of Canada’s decision in Bhasin v Hrynew to introduce what the court referred to as a “common law duty of reasonable exercise of discretionary contractual power”. In doing so, the court cast doubt on the enforceability of clauses in employment documents which purport to restrict the payment of bonuses to “active” employees only. The decision also raised a host of questions regarding deferred compensation plans, as well as “without cause” terminations more generally.

In the instant case, Mr. Styles was an investment manager with Alberta Investment Management Corporation (“AIMCo”) from 2010 until his employment was terminated without cause three years later. His employment was governed by a written employment contract which provided that his employment could be terminated without cause, and set out a clear formula to use to determine the severance to be paid to him in that event. Mr. Styles’ compensation was composed of not only base salary, but also Annual and Long-Term Incentives that were each governed by written plan documents and that had the potential to pay out substantial bonuses. With respect to the Long-Term Incentive Plan (“LTIP”), the documents contained wording in more than one place that required Mr. Styles to be actively employed at the time of payment in order to be eligible for the LTIP payment. Mr. Styles’ employment was terminated without cause prior to the date that the first LTIP payments were to be paid. He was provided with severance in accordance with the written employment agreement, and did not receive any amounts on account of LTIP payments.

At trial, Justice Yungwirth reviewed the Supreme Court’s decision in Bhasin and found there to be a basis for recognizing a common law duty of “reasonable exercise of discretionary contractual powers”. She held that this duty required employers to exercise contractual discretion fairly and reasonably. Justice Yungwirth went on to examine two exercises of contractual discretion by AIMCo: first, the alleged discretion involved in denying Mr. Styles his bonus under the LTIP and second, the alleged discretion to terminate Mr. Styles’ employment without cause. Justice Yungwirth found that because no reason was given for the termination, the employer acted unreasonably in exercising its discretion and should therefore be liable to pay Mr. Styles his bonus under the LTIP.

The Alberta Court of Appeal[i] came to a different conclusion. In concurring reasons, the majority of the panel flatly rejected the concept of a duty of reasonable exercise of discretionary contractual powers. In any event, the Court of Appeal also found that AIMCo did not exercise any discretion. The Court of Appeal held that the language of the employment documents, properly interpreted, gave no right to the employee to receive a bonus unless the employee was actively employed on the vesting date. The awarding of an LTIP bonus did not involve any discretion on the part of the employer; either the condition for eligibility was met or it was not.

Going further, the Court of Appeal disagreed with the lower court’s examination of the discretion involved in the decision to terminate Mr. Styles’ employment. At trial, Mr. Styles argued that the reasonableness of the decision to terminate his employment depended on the employer showing some justification or reason for termination. The Court of Appeal clearly rejected this argument, along with any implication that reasons must be given to justify a without cause termination of employment in Alberta:

An employer can terminate the contract of employment on reasonable notice – no explanation need be given. The employee is entitled to notice or pay in lieu of notice and any other compensation provided for in the written employment contract.

Reconciling With Other Decisions

On first reading, the decision in Styles may seem to be at odds with other recent decisions from other jurisdictions[ii], particularly Paquette v TeraGo Networks Inc. In Paquette, the employee sued for wrongful dismissal and sought payment under a bonus plan that included an active employment condition similar to the provision in Styles. The Ontario Court of Appeal held that:

[a] term that requires active employment when the bonus is paid, without more, is not sufficient to deprive an employee terminated without reasonable notice of a claim for compensation for the bonus he or she would have received during the notice period, as part of his or her wrongful dismissal damages.

How then can one reconcile the very different results in these two cases? Paquette involved an employment contract lacking an express, written provision setting out the employee’s entitlements in the event of a “without cause” termination.  The employee brought a wrongful dismissal claim.  The court awarded the plaintiff 17 months’ notice, and was then required to quantify that award.  Specifically, the court was called upon to decide whether the quantum should include an amount for loss of the bonus that the plaintiff would have been paid had he still been working during the entire notice period.

The Ontario Court of Appeal held that the wording in the plan documents did not clearly and unambiguously alter the employee’s usual common law right to have his wrongful dismissal damages include all of the usual and integral aspects of the employee’s compensation, including his bonus (which he would clearly have received had he been given working notice of 17 months).

In Styles, the employee had a written contract that expressly stated what the employee was entitled to in the event that he was terminated without cause.  The employer paid this amount.  Further, even had the employee in Styles been provided with full working notice (in distinction to pay in lieu thereof), he still would not have been employed at the date the deferred compensation was set to become payable.  In this sense, Mr. Styles was not suing for wrongful dismissal.  He was suing only for a failure to pay him amounts he claimed should be forthcoming to him under the LTIP policy.

What Does This Mean For Employers?

Employment lawyers ceaselessly lecture on the importance of having in place written employment agreements with clear provisions that precisely set out an employee’s entitlements upon termination “without cause”. Styles is an example of an employer who followed that advice and did everything right – it had a clear employment contract that said exactly what the employee should be paid if terminated without cause, and an LTIP policy document requiring that the employee be “actively employed” in order to get the LTIP. It then terminated an employee, and paid him out exactly as the employment contract and LTIP documents prescribed. Styles highlights, once again, the value of clear and reasonable written termination provisions. Not only do they provide clarity to both parties but, moreover, where the employer’s deferred compensation plan contains careful language requiring “active employment”, such termination provisions can also serve to insulate an employer from claims relating to loss of deferred compensation.

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[i] A Memorandum of Judgment concurring in the result was also penned by Justice Berger
[ii] For a review, see our earlier Communique on this topic titled “Avoiding Bonus Payments to Terminated Employees Just Got Tougher

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