DETERMINING THE VALUE OF BENEFITS IN SEVERANCE
PACKAGES.
AN ARTICLE BY EARL ALTMAN, EMPLOYMENT LAW
Garfinkle, Biderman LLP
When an employee is terminated without cause, or sufficient notice,
the amount that the employer must pay in lieu of notice is based
on the total compensation to which the employee had been entitled.
As employers have become more creative in their methods of compensation,
particularly at the more senior levels, the determination of what
must be included in a termination package becomes more complicated.
Two recent decisions of the Ontario Superior Court have dealt with
these issues. While it is clear that the value of benefits such
as medical and dental insurance, and car lease payments must be
included in the value of the termination package, there has been
a significant amount of judicial debate over the extent to which
bonuses, incentives, and stock options which would have arisen during
the period of notice must be included in the termination package,
and how these benefits are to be valued.
The first consideration in determining whether the termination package
must include the value of such benefits is whether or not they are
“integral to the employee’s remuneration package”.
If they are, the assumption is that the value of the benefit is
to be included. However, the requirement to do so may be negated
by specific provisions of the applicable bonus or option plan. For
example, certain bonus plans specifically provide that a bonus which
is payable following the termination of an employee’s employment,
whether or not for cause, will not be paid. In that case, the value
is not included in the termination payment. Similarly, if the provisions
of the option plan provide that options which have not vested as
of the date of termination, whether or not for cause, will be forfeited,
then they are not to be included in determining the value of the
severance package. However, where there is no specific provision
as to the entitlement to the bonus, or to delivery of the options
in the applicable plan, then the law presumes that the value of
the payment in lieu of notice will include all such compensation
that the employee would have received during the period of notice.
It may seem that the simple solution for employers would be to draft
the bonus and stock option plans in such a way as to clearly provide
that the benefits are not payable after termination. However, as
such clauses deprive employees of rights they would otherwise enjoy,
the Courts have interpreted them very narrowly. In one recent decision
of the Ontario Superior Court, issued October 16, 2006, the Court
considered the case of an employee who had worked for the defendant
and its predecessor for a total of ten years. The plaintiff was
entitled to profit sharing and stock grants as part of his compensation.
The plaintiff was terminated without cause and the Court was faced
with the issue of whether the plaintiff was entitled to be paid
the amount which he would have received under the profit sharing
plan during the course of his notice, and as well whether he was
entitled to receive the shares he would have received under the
stock grant plan during the same period.
In its reasons, the Court considered the written provisions of the
Profit Sharing Plan, which provided that the employee’s entitlement
would be forfeited if the employee’s employment were terminated
for any reason. The defendant argued that this provision disentitled
the plaintiff from any payment. The Court disagreed, and relied
on a prior Ontario Court of Appeal decision, which held that the
contract provision referring entitlement after termination must
be interpreted as “termination according to law” absent
any express language to the contrary. As there was no such language
to the contrary in the option plan, in order for the termination
to be lawful, it could only take effect at the end of the appropriate
notice period, in this case ten months after the actual day of termination.
The plaintiff would therefore be entitled to all the profit sharing
payments and shares which he would have received in that ten month
period.
A different judge of the same Court reached a similar conclusion
in determining whether a dismissed employee was entitled to shares
under the employer’s Executive Stock Grant Program. The plan
provided for an annual grant to the company’s executives of
restricted share units, which units would vest over a period of
three years. At the end of the three years, the employee would be
entitled to sell the shares. The plan also stipulated that the employees
would be entitled to sell all of the shares which they had received
under the plan upon a change of control in the employer.
The plaintiff was terminated without cause on September 22, 2005.
Pursuant to his Employment Contract, he was entitled to eighteen
months’ notice. The Agreement provided that the plaintiff
was entitled to receive his salary, together with all bonuses and
benefits for the notice period.
During the eighteen months’ notice, there was a change of
control of the employer. Upon such change of control, the plaintiff
sought payment for his shares based on the change of control provisions
in the stock option plan. The defendant offered a payment of $120,000.00,
based on what it perceived was the plaintiff’s entitlement
under the termination without cause provisions in the option plan.
The employer argued that the termination and change of control provisions
had to be read together, resulting in the terminated employee being
entitled only to his severance even if a change of control took
place during the notice period.
The Court rejected the employer’s interpretation and accepted
that advanced by counsel for the employee, who had argued that the
change of control provision stood apart from the other provisions
of the plan and resulted in an independent entitlement to the employee.
The Court of Appeal agreed with this interpretation and based on
its reasoning in part on a chart prepared by the employer, which
clearly stated that “all units vest and will be paid out…”
on a change of control.
As a result, the Court held in favour of the employee and awarded
him the sum of $315,010.00.
As the demand for more attractive and innovative compensation plans
increases among senior management, employers will have to take care
to ensure that their employment contracts and employment policies
are carefully drafted and frequently reviewed, in order to avoid
assuming liability they never intended to assume. If you wish assistance
with such review, please contact Earl Altman of our office.
If you have any questions regarding the information in this
Newsletter, please contact Earl Altman, or any of the other lawyers
in our office@ealtman@garfinkle.com
More Career Articles
|
