Ottawa Employment Lawyers
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In a recent case, Levinsky v. The Toronto-Dominion Bank 2013 ONSC 5657, an Ontario court confirmed that it is possible to draft contracts that allow employers to “claw back” compensation owed or paid to employees if an employee resigns from their employment. The court also provided guidance on how to prevent such clauses from being rendered void for unduly restraining trade.
Mr. Levinsky was a highly paid vice-president of TD Bank who resigned to start his own hedge fund in 2010. The Long Term Compensation Plan (LTCP) established by TD Bank provided Mr. Levinsky with Restricted Share Units (RSUs) in addition to his base compensation. These RSUs however only became payable once they had matured over a period of three years. The LTCP also provided that if an employee resigned before the end of these three years they would forfeit any of the RSU compensation that had not already been paid.
When Mr. Levinsky resigned his employment he argued that the contractual clause allowing TD Bank to withhold compensation was void as it “restrained trade” by preventing him from leaving TD Bank to set up his own business.
Determining whether the terms of an employment contract unduly restrict trade is a common issue in employment law disputes. Restraint of trade arguments are most commonly advanced against non-competition clauses that may prevent a departing employee from competing against the employer they have departed. In the Levinsky case the court determined that the clause forfeiting Mr. Levinsky of his RSU compensation did not restrain trade, it was merely an element of the agreement between Mr. Levinsky and TD Bank.
In its decision the court emphasized the fact that although the compensation forfeited by Mr. Levinsky was significant it was only a portion of the total compensation he received for his service. To determine whether a particular contractual clause constitutes a restraint of trade the court held that each clause had to be analyzed on the basis of whether the forfeiture of compensation resulted just from an employee’s resignation, or whether it also somehow prevented departing employees from certain courses of business conduct following their departure. In Mr. Levinsky's case the court found the clause in question did not restrict Mr. Levinsky's activities following his resignation.
Frequently Asked Questions
Are paid and unpaid internships illegal in Ontario?
I own a small events and promotions business. Every so often I get emails from students asking if they could volunteer to learn about the business. I’ve never hired a student because they’re inexperienced but I’m considering hiring one as an intern this summer. I don’t have the budget for a full time employee but I would be willing to pay them a modest stipend. I’ve heard both paid and unpaid internships are illegal in Ontario. Is this true?
In Ontario, the rules around internships are strict and in recent years some employers have been required to change their internship programs as a result. If someone is receiving on the job training from a business they are considered to be an employee of the business under Ontario law. As an employee they are entitled to a minimum wage under the Employment Standards Act so paying them a stipend that does not meet the minimum wage is against the law.
There are two exceptions to this general rule which recognize the educational value of internships. The first is internship programs approved by a college or university which are permitted.
The second exception is internships that meet criteria set by the Ministry of Labour. These requirements include that the intern is receiving valuable training, is not taking someone else’s job, and has not been promised a job after their training. The most important feature is the educational component: the primary purpose of internships is to teach valuable skills, not to provide cheap labour to businesses.
The safest way to ensure compliance with the law is to have an internship approved as part of a college or university program. Alternatively, you should design the internship ahead of time to focus it around training and skills development.
Can an employee be forced to forfeit their unvested shares on a termination without cause?
I was fired without cause. What happened to my company shares or stock options?
Your job was just terminated "without cause" and as if it's not bad enough that you just lost your job, you also find out that your shares in the company are no longer yours. Just like they never existed, any unvested shares are forfeited the day you're terminated. For some, this could mean hundreds of thousands of dollars in expected income gone.
So what does "vesting" mean and why is it important in this context? An unvested share simply means that the shareholder's rights to that share is subject to specific conditions. Companies will typically create vesting schedules for the shares they give their employees. The shares are provided to the employee subject to a share agreement which sets out the vesting schedule. That schedule will tell the employee when his/her shares will vest. Once the shares vests, the employee has an absolute right to these shares. They can be sold or kept at the discretion of the employee.
Vesting schedules are extremely useful and can be justified. The logic behind a vesting schedule holds that employees must earn shares that are available to them. The longevity of their employment should be correlated to their performance. If they perform well, their job will remain secure and their shares will vest with time. The vesting schedule dangles the possibility of added income in front of the employee to motivate good performance.
Employers should have the right to motivate their employees in this manner and an underserving employee should not be rewarded with income that was subject to him or her deserving it. Any employee who has justified a termination for cause, should not benefit from the vesting of unvested shares.
The dispute arises when the employee's performance is not at issue. The employee worked hard for the company and did nothing to jeopardise his or her rights to the unvested shares. We know that the employee can still be terminated without cause since no employer is handcuffed to their employees. The dilemma is whether or not that employee should have some right to his or her unvested shares.
Companies can squash any right the employee might have to unvested shares by contracting accordingly. Provisions in the share agreements or long term incentive plans, if they are sufficiently clear, can restrict the rights of the employee to unvested shares no matter if the employee is terminated for cause or without cause. Think of the following scenario:
Your employment is going extremely well. You've just received a promotion and your performance reviews are great. You're then terminated without cause. You're terminated in August. Before being terminated, you held 500 unvested shares in the company valued at $400.00 a share. Based on your vesting schedule, 50% of those shares were to vest in October that same year.
The shareholder's agreement holds that all unvested shares once terminated, notwithstanding cause, would be forfeited immediately. Remember you did nothing to merit your termination. Notwithstanding, your company has terminated you. Had they kept you for another two months, you would have had access to $100,000 worth of shares on top of your current income.
This does happen and, with the rise in e-commerce and proficiency in which new companies make public offerings, courts are now seeing a rise in cases where these types of employee shareholder agreements are in dispute.
The Ontario Court of Appeal (ONCA) has recently addressed a similar scenario in O'Reilly v. IMAX Corporation, 2019 ONCA 991. O'Reilly brought a wrongful termination claim alleging that he was not provided sufficient notice and that his unvested shares were unlawfully forfeited. On a summary judgement motion, O'Reilly was awarded 24 months' reasonable notice. The main issue before the ONCA was whether or not the motions judge was correct in awarding damages for shares that would have vested during the notice period.
The ONCA looked closely at the relevant provisions within the employer's long-term incentive plan and stock option grants. The following provision was highlighted:
(5) Termination of Employment Generally. In the event that the Participant’s employment with the Company terminates for any reason other than death, Disability or for Cause, the Options shall cease to vest, any unvested Options shall immediately be cancelled and revert back to the Company for no consideration and the Participant shall have no further right or interest therein. Any vested Options shall continue to be exercisable for a period of thirty (30) days following the date of such termination; … To the extent that any vested Options are not exercised within such period following termination of employment, such Options shall be cancelled and revert back to the Company for no consideration and the Participant shall have no further right or interest therein.
The Court set out to determine whether the words "terminates for any reason" included termination without cause. The ONCA emphasized the need for clarity in these types of provisions. It agreed with the motion judge "that the reference to terminates for any reason in the plans could not be presumed to refer to termination without cause."
O'Reilly was awarded the entirety of his shares throughout his notice period, valued at what they would have been had he sold them immediately upon vesting. O'Reilly had upwards of 30,000 shares valued between $20-$30 that would have vested during the 24 months' notice. The motion judge's decision on the unvested shares and the ONCA's subsequent dismissal made a difference of upwards of half a million dollars in the overall damages awarded to O'Reilly.
WHAT DOES THIS MEAN FOR EMPLOYEES AND EMPLOYERS?
FOR EMPLOYEES: Do not walk away from your unvested shares without consulting an employment Lawyer. You could be leaving significant entitlements on the table.
FOR EMPLOYERS: Any attempt to limit the common law entitlements of an employee should be clear and unequivocal. Do not assume that general language, meant to encompass all, is sufficient to address one specific scenario. It is best to identify the entitlement within the provision and address it accordingly. Contracts must be drafted with specific consideration to the employer, their employees and the market. Boilerplate contracts leave unintended openings to employees and may significantly hamper the economic status of a company when it attempts to restructure and terminate employees.
Sources:
O'Reilly v. IMAX Corporation, 2019 ONCA 991.
O’Reilly v. Imax Corporation, 2019 ONSC 342.
Veer v. Dover Corporation (Canada), 1999 CanLII 3008 (ON CA)
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I was just let go "without cause", what does this mean?
I was just let go "without cause". What does this mean?
Prior to engaging in any litigious action, clients should have a grasp of not only their rights but those of the employer as well. What may not appear fair, maybe either contractually or legally legitimate. The term "without cause" is seen in most termination letters. There's a very clear reason for this.
The threshold for cause is high and, if the employer is unsuccessful in meeting that threshold, they then risk being subject to damages for wrongful termination inclusive of not only proper notice, but aggravated and punitive damages as well.
A prime example of this risk coming to fruition is seen in Ruston v. Keddco MFG. (2011) Ltd., 2019 ONCA 125. Ruston, former president of Keddco, was fired for cause. Keddco alleged that Ruston committed fraud. When Ruston indicated that he would be retaining legal counsel, Keddco advised him that, if he hired a Lawyer, it would counter-claim against him. They warned that the costs of litigation would be extreme to both parties.
Ruston ignored the threat and filed a claim against Keddco. Keddco followed-up on their promise and brought a counterclaim for $1.7 million. The lower court found that the allegations of fraud could not be proven. It was held that Ruston was wrongfully dismissed. He was awarded 19 months termination pay, in addition to $100,000 in punitive damages and $25,000 in moral damages. The costs award was $546,684. The total award, including payment in lieu of notice, was just below $1 million. The Ontario Court of Appeal dismissed the employer's appeal and withheld the lower courts ruling on these matters. Keddco's total losses would have far exceeded $1 million with their legal costs included.
Had Keddco simply terminated the employment without cause and relied on a properly drafted termination provision, Ruston's damages could have topped out at the Employment Standards Act entitlements. Without a contract, common law notice would have been subject to the soft cap of 24 months and early settlement would have been possible. Without the allegation of fraud and the subsequent counterclaim, Keddco's worst-case scenario would have likely been much better than the current end result.
This is an example of why employers are often advised to dismiss without cause, asserting the employer's right to do so and relying on properly drafted contract provisions to navigate the employees' entitlements upon termination.
So what does this mean for employees? Firstly, do not assume that your performance can no longer be factored into an award for termination pay. The employer can always argue "near cause" which has reduced awards in past decisions. Understand, however, that the most prevalent dispute in a without cause dismissal is the employee's entitlement, by contract and by law.
Employees who are terminated without cause, need to acknowledge that the employer has the right to do so. Nonetheless, they must do so while preserving your entitlements. Those entitlements should not be assessed by yourself or your employer. All aspects governing the employment relationship should be forwarded to a competent employment Lawyer. The employment Lawyer will indicate your entitlements and provide an honest opinion on the viability of disputing the package that was offered.
What does this mean for Employees and Employers?
Employees: Once terminated without cause, do not sign a full and final release without having a Lawyer review the employment relationship and confirm your actual entitlements.
Employers: Asserting cause is a risky position to take. Cost-benefit might weigh in favour of dismissing the employee "without cause." The allegation of cause cannot be retracted. Counsel should be sought prior to alleging cause.
Sources:
Ruston v. Keddco MFG. (2011) Ltd., 2019 ONCA 125 (CanLII)
Ruston v. Keddco Mfg. (2011) Ltd., 2018 ONSC 2919 (CanLII)
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