You’ve terminated an employee without cause, what do you owe them? It may be more than you think.

As a starting position, employees are entitled to compensation for what they would have earned during a reasonable period of notice, unless that right is limited by specific agreement. This includes all elements of an employee’s compensation.

Employment agreements often set an agreed notice period in the event of without-cause termination, limiting the broad and unpredictable common law notice period to some other (presumably shorter) length of time, such as the minimum notice period under employment standards legislation. In any event, if the employer wants to provide payment in lieu of working notice, what must be paid?

Not all of an employee’s compensation is contained in the four corners of the employment agreement. The entitlements under any benefit or incentive plan (such as a bonus, stock option or registered pension plan) need to be accounted for when determining damages arising from termination without cause. For instance, what is the terminated employee’s entitlement to options that vest during the notice period? What about scheduled bonuses? Is an employee entitled to remain a member of the pension plan throughout any notice period?

The answer lies in the text of the relevant agreement, be it a stock option agreement, a particular stock option grant, a bonus plan, a pension plan or some other agreement. Just as with employment agreements, the terms of a benefit or incentive plan can limit an employee’s post-termination entitlement – including restricting participation to periods of active employment – but only to the extent that the plan terms are clear and unambiguous, and are brought to the employee’s attention when they are introduced. The general legal principles are:

• An employee’s rights and obligations are generally governed by the terms of the agreement.
• If an employee’s entitlement is limited, but the limiting language is ambiguous, a court will typically resolve the ambiguity in the employee’s favour. This is especially true if the agreement was imposed by the employer without negotiation.
• If the agreement is unambiguous and clearly states that the employee’s rights are limited in a specific way, including on a dismissal without cause, the agreement should govern, as long as (1) the employee was provided with a copy of the plan and/or advised of the plan language during employment, such as through a benefit booklet; and (2) the plan otherwise complies with employment standards legislation.

So a plan/agreement may rebut the principle that the benefit continues during the common law notice period, as long as it clearly and unambiguously states that any right to participate in the plan ends on the later of (i) the day active employment ends (i.e., does not continue into the notice period); or (ii) the end of the minimum period during which benefits must be continued by legislation (for instance, Ontario’s Employment Standards Act, 2000 requires that employers maintain a terminated employee’s benefits during the statutory notice period).  In that case, the agreement will stand and plan participation will end accordingly. However, if the language of the plan is unclear, the employee will be entitled to any benefit that would have accrued during the notice period.

It is important to keep in mind that the threshold for clarity is high and can be difficult to meet in cases of termination without cause. For example, Canadian courts have, in certain circumstances, decided that the terms “termination for any cause” or “involuntary termination” were not sufficiently clear or unambiguous to prohibit continuation during the reasonable notice period, because it was not clear in the plan whether employment was “terminated” as of the last day of work, or at the end of the common law notice period.

If you are looking for clarity and predictability in settling severance packages, you should set clear and unambiguous parameters on notice periods and post-termination entitlements, not only in your employment agreements, but also in the documents that make up your benefits and incentive programs.

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