Employers can avoid paying some incentives after termination

Employers often want to avoid paying bonuses or other incentive payments to employees after they are terminated. The best way to achieve this is to consider the problem in advance and create a proper written employment agreement and written bonus plan/incentive policy. 

In late 2020, the Supreme Court of Canada released an important decision in Matthews v Ocean Nutrition Canada Ltd.. In that case the court held that Matthews was entitled to payment of over $1 million pursuant to a long-term incentive plan because the plan did not sufficiently state that he would not be entitled to the payment during his reasonable notice period. See our blog post about that case here.

Employers will be reassured to see that sometimes the courts will accept that an incentive payment is not payable after termination. 

In Mikelsteins v. Morrison Hershfield Limited, 2021 ONCA 155, the Ontario Court of Appeal decided that an employee was not entitled to a share bonus after termination. Read the decision here.

In Mikelsteins, the employee owned shares in the employer after he was given an option to purchase them with his own funds. His shares were then governed by a Shareholders Agreement. The Shareholders Agreement entitled the shareholders to receive “Share Bonuses” based largely on the performance of the company. The Share Bonus was not tied to the shareholders’ contributions as employees. The Shareholder Agreement specified that, on termination of employment, the shareholder is immediately deemed to transfer their shares in exchange for fair value at that time.    

Mr. Mikelstein was a long-term employee. He was entitled to 26 months of reasonable notice on termination. He argued that he was entitled to the Share Bonuses that would have been paid during those months. He also argued that he was entitled to have his shares valued at the end of the 26-month notice period. 

The Court of Appeal said the common law principles regarding termination of employment did not apply to the share entitlement. The share entitlement was based on the Shareholder Agreement. The Shareholder Agreement said the shares were immediately transferred on termination; not at the end of any notice period. Mr. Mikelstein also had no entitlement to any Share Bonuses after termination because he did not own the shares during the notice period. 

In January 2022, the Supreme Court of Canada decided that Mr. Mikelstein could not appeal the Ontario Court of Appeal’s decision. 

This case demonstrates that incentive payment issues need to be reviewed carefully when considering what an employee is entitled to on termination. It also demonstrates how employers can successfully avoid paying incentive payments after termination in some circumstances. The simplest way to achieve this is to have a properly drafted employment agreement and bonus policy, incentive plan, shareholder agreement, etc.  

Still have questions about incentive plan arrangements? Contact Scott Marcinkow at smarcinkow@harpergrey.com or anyone else from our team listed on the Authors page.