DETERMINING THE VALUE OF BENEFITS IN SEVERANCE PACKAGES.
Posted: 12.08.2015
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
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
