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Performance Based Incentives Could Survive Termination: LTIPS, vested or unvested, can be a substant

Long term incentive plans are a popular mechanism to both attract and, more importantly, retain senior level personnel. Such was the case in Styles v Alberta Investment Management Corporation, 2015 ABQB 621, where a senior employee received compensation in the form of a long term incentive plan (LTIP). He received between $110k-$130k each year over three years of service that was contributed to his “unvested” portion of an investment fund. The employee was then terminated prior to the dates on which the LTIP would vest under the program. The employee was terminated for unstated reasons, however there was no argument by the employer that the termination was for cause. The employee claimed for the entirety of his LTIP that had been earned but not vested up to his termination. The employee's arguments were largely based on the recent Supreme Court of Canada decision, Bhasin v. Hrynew, which explicitly recognized a requirement for good faith in contractual dealings between the parties. The Court in Styles held that the employer had made certain promises that included a high level of performance-based compensation in order to obtain key personnel and those promises were an inducement to the employee to accept employment; the LTIP grants were compensation and motivation for performing “good work”. As a result, the employer was required to perform honestly, fairly, reasonably and with appropriate regard to the contractual interests of the employee when terminating the contract; although the employer had the right to terminate the employee, it could not do so in a way that undermines the legitimacy of the contractual interests of the employee, i.e.: the employee’s long term expected compensation. The employee was entitled to compensation for LTIP that was calculated by examining both the potential returns and further contributions he could have made to the plan and negative economic impacts that could have affected the underlying investment fund. Some points to take away are:

  • Regardless of whether a long term incentive plan says it doesn’t vest until some future time, an employee could have a legitimate claim to be paid for what he or she would have received, but for the employer’s termination of the employment contract;

  • Courts may examine the potential returns, future investments and economic impacts in determining appropriate compensation if the long term incentive plan is tied to fund investments;

  • An inducement to attract and retain senior employees and personnel could be an argument against an employer that attempts to deny unvested employee compensation at termination;

  • Long term incentive plans that reflect performance based compensation regimes could support an employee’s claim for payment of unvested compensation at termination; and,

  • The application of Bhasin v. Hrynew continues to unfold, not surprisingly to indicate that an employer cannot escape what would have been contractual obligations by terminating an employee prior to those obligations arising.

We would be pleased to discuss the effect and potential employee entitlement of LTIPs and the Styles case further with you.

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