1. Entitlements on Termination (Common Law Provinces)
There is no “at-will” employment in Canada. Accordingly, upon termination of employment, employees are generally entitled to notice (or pay in lieu of notice) under statute, the common law (or, in the case of Quebec employees, civil law in Quebec) and/or contract.
Applicable employment standards legislation in all Canadian jurisdictions (province, territory or, for certain industries such as banking, aerospace and telecommunications, the “federal” jurisdiction) sets out the minimum notice (or pay in lieu of notice) obligations upon the termination of employment without cause. In turn, written contracts of employment may contain provisions that limit employees to their minimum statutory entitlements or provide contractual termination entitlements exceeding these entitlements. Any obligations regarding dismissal described by a valid contract will govern the termination of employment, so long as the minimum statutory obligations are met by the contracted provision.
In the absence of a written contract of employment limiting entitlements on termination without cause to the statutory minimums (or if the limiting language in the contract is found to be unenforceable), employees are also entitled to reasonable notice of termination of employment, or pay in lieu of reasonable notice, at common law. Please note that, while civil law entitlements in Quebec are often analogous, for concision, this guide does not separately address Quebec-specific requirements and nuances. There is no fixed formula for determining common law reasonable notice in any given case. Rather, the courts take into account a number of factors, including the employee’s age, length of service, position, level of compensation and the availability of similar employment. In essence, courts attempt to identify the length of notice required to provide the employee with a reasonable opportunity to find alternative employment of a similar nature. Generally, common law reasonable notice periods range from three to six weeks per year of service, to a soft upper limit of 24 months.
Courts will generally award damages regarding a common law notice period equal to all forgone “integral” components of compensation, as if the employee were still employed during such period. As a result, courts will generally include damages based on the value of the equity-based compensation that would have vested during such period.
To manage the risk of damages for forgone vesting during a common law notice period, it is important to include clear and unambiguous language in equity compensation plans and award agreements that supplant the common law entitlement. Well-drafted provisions can serve to cease vesting at the date on which the employee’s employment ends, without regard to any later common law reasonable notice period end date (but subject always to any minimum statutory notice periods required by applicable employment standards legislation). Courts often scrutinize the drafting of such provisions, and, if they are found to be unenforceable, an entitlement to common law damages can again arise notwithstanding the employer or issuer’s intent to contract out of these. To be enforceable, drafting therefore typically incorporates the elements that courts have found to lead to enforceability in prior decisions while avoiding language that courts have previously found to be unenforceable. Consultation with employment lawyers is recommended, and language drafted to be enforceable in one Canadian jurisdiction may still require revision before deployment to employees in another Canadian jurisdiction.
Please contact any member of our Employment & Labour group to discuss drafting approaches to mitigate Canadian employment law risks or the employment law aspects of incentive compensation more generally.
2. Restrictive Covenants
Equity compensation plans and award agreements provide an opportunity to include restrictive covenants such as non-competition, non-solicitation and confidentiality obligations. The equity-based award itself may constitute sufficient consideration at law for the employee’s agreement to be bound by these covenants.
To be enforceable, restrictive covenants must be reasonable and no broader than necessary to protect the employer’s legitimate business interests. Courts will scrutinize the scope, geographic reach and duration of restrictive covenants, and will decline to enforce covenants that are overly broad or ambiguous. Any restrictive covenants included in equity compensation plans or award agreements should be carefully tailored to protect specific, identifiable interests and limited in scope to what is reasonably necessary in the circumstances.
In addition, under Ontario employment standards legislation, a post-employment non-competition covenant is prohibited, except for chief executive level employees. The prohibition does not apply in other provinces, nor does it restrict the use of non-solicitation covenants. As of writing, draft legislation in the federal jurisdiction would, if passed, also restrict non-competition covenants for employees employed in that jurisdiction.
Again, since employment law differs by Canadian jurisdiction, restrictive covenants prepared with the assistance of Canadian legal counsel for one jurisdiction may not be enforceable in another jurisdiction without further modifications. Similarly, restrictive covenants prepared for a jurisdiction outside Canada will very frequently require further modifications to be enforceable in Canada, especially for non-competition covenants.
Please contact any member of our Employment & Labour group to discuss drafting approaches to restrictive covenants or the employment law aspects of incentive compensation more generally.