Dismissed Employee’s Entitlement to a Shareholders’ Bonus, The Law Times (December 10, 2018, p 7)

06 Dec Dismissed Employee’s Entitlement to a Shareholders’ Bonus, The Law Times (December 10, 2018, p 7)

DISMISSED EMPLOYEE’S ENTITLEMENT TO A SHAREHOLDERS’ BONUS
By Nikolay Y. Chsherbinin

An employee’s employment is terminated when he or she is dismissed without cause, not when the notice period ends. The date of an employee’s dismissal is, thus, a question of fact. When an employer dismisses an employee without cause and without proper notice this constitutes a wrongful dismissal, and any payment in lieu of notice is intended to compensate for the employer’s breach of the employment contract. In general, damages for wrongful dismissal are designed to reflect the total compensation the employee would have earned during the proper notice period. In Evans v. Paradigm Capital Inc., 2018 ONCA 952, the Court of Appeal for Ontario considered whether an employee is entitled to a shareholders’ bonus, despite being subject to divestment of shares on dismissal. It resolved that pursuant to the shareholders’ agreement the employee ceased to be a shareholder upon the termination of her employment and was no longer entitled to the shareholders’ bonus during the reasonable notice period.

In Evans, on January 16, 2009, Paradigm Capital Inc., an independent, employee-owned institutional investment dealer constructively dismissed Fabiene Evans, who was employed as an institutional equity salesperson. The trial judge awarded Evans 11 months’ pay in lieu of notice. This amounted to $240,313.79 in damages, which was comprised of Evans’ base salary ($75,000), performance bonus and a shareholders’ bonus ($79, 792.58), being dividends to which she was entitled as an equity stakeholder in Paradigm.

Evans appealed on the basis that the trial judge erred, inter alia, in calculating her performance bonus entitlement based on her last percentage allotment, rather than a three-year historic average of her performance bonus, which resulted in her bonus being lower. Paradigm cross-appealed on the basis that the trial judge erred, inter alia, in awarding Evans damages related to the shareholders’ bonus, even though her equity interest in the company had been redeemed following her dismissal in accordance with the shareholders’ agreement.

The Court of Appeal dismissed Evans’ appeal with an apt reminder, that “although it may sometimes be appropriate to calculate damages based on an average of earnings, there is no requirement to do so.”

In response to Paradigm’s cross-appeal, Evans argued that the trial judge correctly found that her right to receive the shareholders’ bonus was an integral part of her overall compensation. Given that payment in lieu of notice is intended to compensate for breach of the employment contract, Evans argued that she should be entitled to all losses arising from Paradigm’s wrongful termination during the notice period. Paradigm responded that dividends can be claimed only by shareholders. Pursuant to the terms of its shareholder’s agreement, Evans ceased to be a shareholder upon the termination of her employment and Paradigm redeemed her shares and debentures pursuant to the deemed transfer notice provided for in that agreement.

At trial, the judge found that Evans’ interest in the equity and the right to receive an annual shareholders’ bonus was vested on acquisition of the shares and debentures, subject to divestment on her leaving Paradigm. Accordingly, this fact distinguished her interest from the contingent interests described in the stock option bonus cases that the judge cited in support of his conclusion. However, in the Court of Appeal’s view there was no relevant distinction for the purposes of this case.

Relying on its earlier judgment in Love v. Acuity Investment Management Inc., 2011 ONCA 130, the Court of Appeal reminded that an employee’s employment is terminated when she is dismissed without cause, not when the notice period ends. Evans’ employment was terminated when she was dismissed without notice, that is when she was constructively dismissed. Pursuant to the terms of the shareholders’ agreement Evans was required to tender her shares for redemption on dismissal, being a fact that the trial judge failed to heed. Once the dismissal occurred, Evans was no longer entitled to receive the shareholders’ bonus. The Court of Appeal explained that, if it were otherwise, Evans would have received both the return of her share capital upon dismissal and the dividends she would have earned had she retained the shares and her capital remained at risk in Paradigm for the duration of the 11 months’ reasonable notice period. Consequently, the Court of Appeal granted the cross-appeal in part and deducted $79,792.58 from Evans’ damages.

The Court of Appeal declined Paradigm’s invitation to substitute the judge’s award of 11 months’ notice with 6 to 8 months’ notice. It is trite law that an appellate court would not interfere with a trial judge’s decision on the appropriate notice period unless it falls outside an acceptable range as determined by similar cases.

Evans reaffirms that courts will scrutinize the wording of an applicable equity-granting agreement as part of their assessment of an employee’s entitlements at dismissal. If, on a fair reading, the wording of such an agreement is unambiguous, the employee will be bound by its terms. Failure to give effect to the terms of such an agreement is reviewable. These types of agreements may differentiate between the triggering events, such as: termination for death, permanent and total disability, retirement, resignation and dismissal for any other reason. Absent language that defines the triggering event, the parties will be presumed to contemplate a triggering action that complies with the law, which will likely keep the dismissed employee’s rights alive until the end of the reasonable notice period required for lawful dismissal. Hence, the focus of the scrutiny will be on the wording of the triggering event and its trigger date.

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