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Breaking News: Employment Contracts Continue to be Important

February 20th, 2017   Authored by Jennifer Joss

A couple employment law truisms:

  1. An employer has the right to dismiss an employee without cause, so long as notice or compensation in lieu of notice is provided to the employee.
  2. An employee is entitled to all compensation due to her during the notice period unless the employment contract stipulates otherwise.

These employment law fundamentals were recently reaffirmed by the Alberta Court of Appeal in Styles v Alberta Investment Management Corporation, 2017 ABCA 1, rev’g 2015 ABQB 621.

The employee in Styles was hired as an Investment Manager by Alberta Investment Management Corporation (“AIMCo”) in June 2010. His compensation package included a substantial salary as well as bonuses and Long Term Incentive Plan (LTIP) grants. The LTIP grants were awarded annually but were only payable to the employee after a period of four years. To receive the payout, employees were required to sign a Participation Agreement and remain actively employed by AIMCo.

Throughout the LTIP documents as well as the Participation Agreement, there were numerous provisions plainly and clearly disentitling the employee from any LTIP grants that were awarded but had not vested at the time of termination of employment or during the notice period following termination.

Styles’ employment was terminated without cause in June 2013. AIMCo paid out severance but did not pay out the LTIP grants since they had not vested at the time of termination of his employment as per the contract. No bad faith was alleged by the employee.

Despite the plain wording of the LTIP documents and Participation Agreement, the trial judge found that the employee was entitled to all of the LTIP grants he was awarded, a value of approximately $444,000. The trial judge found that AIMCo breached its duty to exercise its “contractual discretionary powers” reasonably by dismissing the employee and, at the same time, failing to take into account the employee’s “legitimate contractual interests” in deciding not to pay him the value of his LTIP grants. By terminating Mr. Styles’ employment, the employer unfairly took away his ability to satisfy the condition precedent for receiving payment of the LTIP grants, i.e. they prevented him from continuing to be an active employee (paras 128 and 134).

The trial judge’s decision in effect eroded an employer’s right to terminate an employee’s employment without cause and, at the same time, entitled an employee to compensation clearly not provided for by the contract. We expect that employers throughout Alberta collectively shuddered when this decision was issued.

In January 2017, the Alberta Court of Appeal reversed the trial judge’s decision. It reaffirmed that termination without cause is not a breach of contract and that an explanation is not required to terminate an employee’s employment without cause (para 41). Upon dismissal without cause, employees are entitled to notice or payment in lieu of notice and the employment contract can be structured to disentitle an employee to certain compensation they would otherwise receive if they had continued active employment. An employee’s contractual interests, legitimate or otherwise, which are not provided for by the contract have no bearing on the employee’s entitlement to compensation.

The case is noteworthy not because it forges new legal ground, but rather because it reaffirms foundational principles of employment law. After the recognition by the Supreme Court of Canada of the duty of good faith in contractual performance (Bhasin v Hrynew, 2014 SCC 71), there was uncertainty as to what shape that duty would take. The lower court in Styles is an example of how that duty, if left unchecked, could become the launch pad for all sorts of previously unrecognized obligations for employers.

Just as the Alberta Court of Appeal reaffirmed historical principles, the lessons for employees and employers also harken back to traditional ground. This case is a reminder for both employers and employees to read their employment contracts carefully. A court will rightly look to the employment contract to determine the employee’s entitlement. Stating that “an employee must be an active employee” or that “the benefit terminates upon termination of employment” is likely not sufficient to disentitle an employee from grants or other benefits that may vest after the termination date but within the employee’s notice period. Clearly setting out what an employee is entitled to during the notice period assists the employer by avoiding costly litigation and assists the employee in knowing what risks they might face if they are dismissed without cause.