The Clause That Saved The Company $7 million: Is It Bionic or Just Good Drafting?

September 2017

Article by: Graeme McFarlane

Previously printed in the LexisNexis Labour Notes Newsletter.

Terminating the employment of a senior executive can be expensive business. In normal circumstances, a dismissed employee is entitled to be paid all the remuneration the employee would have received had he or she worked through the “reasonable notice period”.  For some employees, this would mean payments on account of bonuses, stock plans and other performance metrics.  However, these expenses can be managed if the employer puts proper employment contracts in place.

This type of situation was recently considered by Alberta’s Court of Appeal. In the decision in Cornelson v. Alliance Pipeline Ltd., 2017 ABCA 13, the Court grappled with the question of whether a significant bonus was payable during the notice period.

The plaintiff, Dennis Cornelson, had been the President and CEO of Alliance Pipeline Ltd. He served in that position for approximately three years.  When he began his employment, he executed an employment contract that provided for a severance payment of 12 months of base salary.  After he had been working for a while, the company implemented a Long Term Incentive Plan (“LTIP”) which provided qualifying employees with “phantom shares” that could be sold to the company at an agreed value.

The company decided to terminate Mr. Cornelson’s employment but the parties could not agree on an appropriate exit package. Mr. Cornelson sued for wrongful dismissal.

Among other things, the trial judge ruled that the plaintiff’s employment contract displaced the entitlement to reasonable notice on termination. Accordingly, Mr. Cornelson was only entitled to receive 12 months of base salary as compensation for his dismissal.  Mr. Cornelson was unhappy with that result.  He appealed and sought what he believed would have been his LTIP award over that period of time – an amount of over $7 million.

The Court dismissed Mr. Cornelson’s appeal. Relying on the Supreme Court of Canada’s decision in Machtinger v. HOJ Industries Ltd, 1992 CanLII 102 (SCC), the Court said, “Parties to an employment contract are entitled to negotiate provisions with regard to notice or severance pay when an employee is dismissed without cause that take the place of any requirements at common law – provided the amounts negotiated exceed any statutory minimums.”  The Court further held that by tying the separation payment to base salary rather than months of notice, the terms were certain enough to disentitle the employee to benefits during the 12-month period.  The Court found that Mr. Cornelson had accepted the contractual severance payment would compensate him for all losses related to any termination.

This case runs contrary to a line of authority that holds clear language is required in order to remove an employee’s right to a bonus entitlement during the notice period: Paquette v. TeraGo Networks Inc., 2016 ONCA 618.  In Paquette, the Ontario Court of Appeal held that a requirement for an employee to be “active employed … on the date of the bonus payout” was not enough to disentitle him or her to a bonus during the notice period.  While the Paquette case was not addressed by the Alberta court, a differentiating factor may be that the termination provisions in Paquette were phrased in terms of months of notice while in Cornelson they were described as an entitlement to months of base pay.

This case once again highlights the care that must be taken when drafting termination provisions and post-termination benefit entitlements. Here, the difference amounted to over $7 million.  Try explaining such a discrepancy to your boss.