Chances are excellent that if you had asked 100 employment lawyers if an employer could change the variable component of an employee’s compensation for the duration of a termination notice period, 99 would have said no. That number may have changed due to a recent decision of the Ontario Court of Appeal.
The employee was a director of an investment fund for a financial corporation. In addition to salary and commission, he was entitled to compensation based on his participation in a profit-sharing plan called a carried-interest plan (CIP). The employer had stated in writing that the award of a certain number of points year to year did not form a contract or commitment to award the same number of points or any points, for that matter, in the future. In June 2013, the bank announced that it planned to eliminate the CIP and did not propose to introduce a replacement plan. In early 2014, the plaintiff was terminated. As part of his termination, the employee was offered 13 months’ pay in lieu of notice, and informed that he would be paid the compensation owing to him under the CIP to the date of his termination. The employee declined the offer and initiated litigation against the employer.
In 2015 and 2016, the CIP was wound up, and the employee was paid his share of profits stemming from the fund earned up to the date of termination, which totalled over $5 million. At the time of termination, the earnings on the CIP amounted to approximately 50% of the employee’s total compensation.
The trial judge found 18 months to be a fair and reasonable notice period for the dismissal. The judge further found that, though the employee had been paid the full amount owing under the CIP through to the termination date, he was also entitled to damages representing the “lost opportunity to earn entitlements under the … CIP during the 18-month reasonable notice period”. This was not an insignificant sum, as the award of variable compensation for the notice period amounted to nearly $1 million.
Court of Appeal
The lower court decision to award the employee variable compensation for the duration of the notice period was reversed by the appellate court, although with reasons which were subject to a strong dissenting view. The majority concluded that the plaintiff and his employer had contracted to allow the employer this right to terminate the variable compensation under the CIP, pure and simple. There was no argument advanced that the “contract” was in violation of a statutory notice obligation.
The dissent agreed with the trial judge, based on the argument that there was no language in the initial CIP documentation which allowed the employer to escape the implied term that such a fundamental change in compensation required fair notice. Many prior cases had concluded that to enforce such a contractual term required clear and unequivocal language to contract out of the notice obligation which was not present in this instance.
The appellate decision seems at odds with many prior cases. The dissent was written by a seasoned and well-respected appellate judge. It remains to be seen if this indeed is the last word on this topic. A further appeal requires “leave”, which is difficult to obtain, however, should it progress to the Supreme Court, we will provide an update at that point.
The company in this instance succeeded notwithstanding a poorly drafted policy document. Legal advice would have allowed for a more clearly-drafted document with language that better supported the employer’s position. All such documents, particularly those limiting an employer’s obligations and an employee’s entitlement with respect to compensation, should be reviewed carefully with experienced employment counsel in order to avoid costly litigation down the road.
Get Advice Before You Act
If you have questions about this issue or any employment issue, contact the offices of Toronto employment lawyers Grosman Gale Fletcher Hopkins. We regularly advise employees and employers on issues in the workplace. Contact us online or by phone at 416-364-9599 to schedule a consultation.
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