Canadian Employment Law Today

6 | November 20, 2019 Cases and Trends Canadian HR Reporter, 2019 centive compensation plans, and from 2004 until his termination in 2014, he participated in a specific incentive compensation plan. e employee was allocated points in that specific incentive compensation plan rep- resenting his share in the aggregate profits and losses for two separate portfolios, Fund 1 and Fund 2. In mid-2013, the employee was notified that RBCDS was considering putting an end to its continued reinvestment in the mezza- nine fund. In February 2014, he was informed that his employment would be terminated without cause effective that month. He was offered his base salary, bonus payments and benefit entitlements for 13 months. In June 2014, the employer took steps to terminate the incentive compensation plan in which the employee participated. As the mez- zanine fund was wound down in 2015 and 2016, the employee was paid what he was entitled to in respect of his participation in Fund 1 and Fund 2, the only funds that ex- isted at the time of his termination. e employee refused the termination of- fer and sued for wrongful dismissal. e trial decision As noted above, the primary issue in this case was whether the employee was entitled to be awarded damages for the lost oppor- tunity to earn incentive plan compensation during the notice period. e trial judge concluded that the em- ployee should have received 18 months' notice of termination. He found that by cancelling the funds and thereby depriving the employee to earn income from them, the employer constructively dismissed the employee. e trial judge decided that the employee was entitled to an amount beyond the profits he had received from Fund 1 and Fund 2. He concluded that the employee's wrongful dismissal damages should include incentive plan compensation in the amount of $953,392 for a lost opportunity to earn entitlements under the incentive compen- sation plan during the 18-month reason- able notice period. is sum was calculated based on the incentive plan compensation the employee earned historically. e appeal decision e OCA overturned the trial judge's deci- sion and held that the employee was not en- titled to incentive plan compensation dur- ing the 18-month notice period. e court concluded that the trial judge made a pal- pable, overriding and reversible error when he failed to conduct an examination of the terms of the relevant incentive compensa- tion plan. e OCA set aside the trial judge's award to the employee. e OCA confirmed several key legal principles set out in prior precedent: • When an employer terminates an employ- ee without cause, the employer is liable to the employee for damages for breach of contract, measured by the loss of wages or salary and other benefits that would have been earned over the notice period. • e terminated employee is entitled to a common law claim for damages for the loss of pension benefits the employee would have earned had the employer not breached the contract of employment and for the loss of bonuses or incentive pay- ments that are an integral part of the em- ployee's compensation. • When considering a claim by a terminat- ed employee for damages with respect to benefits payable under such plans during the period of reasonable notice, the court should ask the following questions: • Does the employee have a common law right to damages for breach of contract? • Does the plan contain a contractual term that alters or removes a common law right and was it brought to the attention of the employee? e OCA's approach focused on the con- tractual language of the relevant incentive compensation plan. e court examined its terms in the context of the contract as a whole, an exercise that it noted the trial judge failed to conduct. e OCA focused on Article 9.3 and Ar- ticle 4.4 of the incentive compensation plan. e court noted that Article 9.3 clearly dis- closed that one risk of the employee's con- tract of employment was that the manage- ment committee could terminate the plan effective as of the end of any investment period with respect to future investment pe- riods. It noted also that Article 4.4 provided that the status of a participant with respect to any investment period "shall not give any participant the express or implied right . . . to any points for any future Investment period." Based on this analysis, the OCA conclud- ed that the employee's entitlement to earn payments under the incentive compensation plan was tied to the existence of the funds created for different "investment periods." Under the incentive compensation plan, investments made by the bank and man- aged by RBCDS in the mezzanine fund were placed into portfolios established for defined "investment periods." e first portfolio, Fund 1, covered an Initial investment period. Investments made in the subsequent invest- ment period were known as Fund 2. When the Fund 2 investment period ended, a Fund 3 investment period was contemplated. e OCA held that the employee was not entitled to any earnings under the plan dur- ing the period of reasonable notice beyond those connected to Funds 1 and 2. Funds 1 and 2 were the only funds that existed during the last decade of his employment and the period of reasonable notice. "By awarding Mr. Manastersky damages for earnings beyond those relating to Funds 1 and 2, the trial judge effectively was holding that RBCDS was obligated to establish some notional Fund 3 that would exist at least until Mr. Manastersky's period of reasonable no- tice came to an end," the OCA said. e court noted that the incentive com- pensation plan was the product of an agree- ment between a sophisticated employer and a group of sophisticated employees. Its terms, including Article 9.3, were fully dis- closed to the employee at the time of his offer of employment and the employee signed the plan and amendments to the plan. e OCA concluded that RBCDS exer- cised a fully-disclosed right to terminate the plan and there was no constructive dismissal. Bottom line for employers e OCA's decision in Manastersky provides guidance to employers that seek to preclude terminated employees from continuing to earn incentive plan compensation during a reasonable notice period. It suggests that, to achieve this end, employers should ensure that all documentation pertaining to the employee's position contains clear and un- ambiguous terms that eliminate such a right. Employers are, therefore, encouraged to pay close attention to the language in all of their employment documentation, including the language in their incentive compensa- tion plans, and to clarify what entitlements an employee may have upon termination of employment. Employers should ensure that such documentation contains a term that allows the employer to make changes to the plan, as well as a term that explicitly removes a terminated employee's right to earn incentive plan compensation during the reasonable notice period. e employer should then bring these contractual terms to the employees' attention. While an employer cannot contract out of employment stan- dards legislation, it can take effective steps to limit its common law liabilities. For more information see: • Manastersky v. Royal Bank of Canada, 2019 ONCA 609 (Ont. C.A.). Rhonda B. Levy is a knowledge management counsel for Littler LLP in Canada, monitor- ing legislative, regulatory and case law de- velopments. She can be reached at (647) 256- 4545 or rlevy@littler.com. Monty Verlint is a partner with Littler LLP in Toronto, prac- tising in all areas of labour and employment law. He can be reached at (647) 256-4506 or mverlint@littler.com. « from INCENTIVE PLAN on page 1 Employer not obligated to establish new fund

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