Quebec Court of Appeal Confirms Damages for Unvested Restricted Share Units Following Termination of Employment Without Serious Reason

The volatile job market of recent years has led to a notable shift in employee compensation trends, as employers look for new ways to attract, motivate and retain talented employees. Long-term incentives such as equity-based compensation plans – once reserved for top executives – have now become a popular component of key employee compensation packages, particularly for start-ups seeking to offer better terms of employment without directly affecting their bottom line.

To attain such results, employers must ensure meticulous drafting of the plan documents, which requires an in-depth understanding of the business and expertize in employment law among others. The plan must stipulate clear provisions dealing with the treatment of equity-based compensation upon termination of employment in light of the impact of public order provisions such as section 2092 of the Civil Code of Québec (the “CCQ”). The mentioned section establishes an employee’s right to claim damages in compensation of the loss suffered where insufficient notice of termination is given and prevents an advance renunciation of that right.

Employers who offer equity-based compensation plans should take note of the recent judgment rendered by the Québec Court of Appeal (the “QCA”) in Endeavour Canada Holdings Corporation v. Boucher^[1], which confirmed a substantial award of damages representing the value of restricted share units (“RSUs”) granted to an employee whose employment was terminated without a serious reason, even though the RSUs were unvested at the time of termination. The judgment places a spotlight on the terms of the plan as well as the employer’s policy relating to notice of termination of employment.

Facts

On May 6^th, 2020, while the employee (the “Respondent”) – a 56-year-old general electrical foreman with more than 11 years of service  – was on a voluntary unpaid leave due to a respiratory condition which made him vulnerable to the COVID-19 pandemic, he was dismissed for refusing to return to work at a mine site in West Africa. Although the Respondent maintained he was entitled to remain on unpaid leave, the employer considered his refusal unjustified and terminated his employment without prior notice and without warning that his job was on the line. It bears note that the employer was in the midst of a sale of the business which closed on July 1^st, 2020, such that the purchaser (the “Appellant”), due to its merger with the employer following the sale, inherited the rights and obligations of the employer, including those related to the Respondent’s pre-closing dismissal.

In the course of his employment, the Respondent had been granted a total of 27 001 RSUs which, in the normal course, would have vested at the end of a three-year performance cycle in accordance with the terms and conditions of the plan, such that the RSUs were unvested on the date of termination. However, as per the terms of the plan, the employer’s board of directors accelerated the end date of the performance cycle and terminated the plan effective on the date of closing, such that all RSUs granted to actively employed participants became vested on July 1^st, 2020.

The Respondent filed an application at the Québec Superior Court (the “QSC”) claiming that he was dismissed without a serious reason and was owed an indemnity in lieu of reasonable notice of termination. The claim included, among others, damages corresponding to the value of the Respondent’s RSUs on the basis that they became vested during the reasonable notice period he was owed pursuant to the employer’s policy which provided for four weeks of notice of termination per year of service (the “Severance Policy”).

The Quebec Superior Court Judgment 

In a judgment rendered on September 30^th, 2020^[2], the QSC held that the employer had acted prematurely by failing to apply progressive discipline or advising the Respondent that he risked dismissal if he maintained his refusal to return to work. As a result, the QSC ruled that the Respondent was dismissed without a “serious reason” within the meaning of section 2094 CCQ.

Applying the terms of the Severance Policy, the QSC ruled that the Respondent was owed approximately 11 months of reasonable notice and awarded a total of $280,118.63 in damages equivalent to the compensation he would have received had he continued to work during the notice period in accordance with sections 2091 and 2092 CCQ. The award included the amount of $123,934.59 corresponding to the value of his 27 001 RSUs on the basis that they became vested during the reasonable notice period.

With respect to the quantum of damages, the QSC dismissed the argument that no indemnity was owed because the Respondent was on a voluntary unpaid leave at the time of his dismissal. Specifically, the QSC held that this argument was based on an assumption that the Respondent would have indefinitely remained on unpaid leave and that it would establish the illogical principle that every employee on unpaid leave at the time of their dismissal is not entitled to reasonable notice of termination.

With respect to the RSUs, the QSC applied the terms of the Severance Policy which, on one hand, expressly provided that an employee whose employment is terminated by the employer maintains their rights to RSUs until they become vested at the end of the performance cycle in accordance with the terms of the plan. The plan, on the other hand, stipulated that the number of RSUs vested were subject to a prorated adjustment based on the number of days worked during the performance cycle and expressly excluded any period of reasonable notice of termination for the purposes of the prorated calculation.

In what appears to be a misunderstanding of the terms of the plan, the QSC held that the plan did not contemplate the treatment of RSUs following the termination of a participant’s employment without a serious reason and refused to apply the prorated adjustment for the vesting of RSUs. The QSC reasoned that such calculation would apply only to a claim for RSUs that would have been granted (as opposed to vested) during the notice period. The QSC thus held that all of the Respondent’s 27 001 RSUs became vested.

The Appellant appealed the judgment to the QCA, but only regarding the quantum of damages awarded in connection with the RSUs on the basis that the QSC should have applied the prorated adjustment provided for in the plan.

The Quebec Court of Appeal Judgment

In a judgment rendered on January 26^th, 2024, the QCA dismissed the appeal and confirmed the quantum of damages awarded in relation to the Respondent’s RSUs, notwithstanding certain flaws noted in the QSC’s analysis of the plan.

Contrary to the reasons issued by the QSC, the QCA found that the plan did, in fact, contemplate the treatment of RSUs upon termination of a participant’s employment without a serious reason – albeit implicitly – by providing for (i) a participant’s continued right to vest RSUs until the end date of the performance cycle notwithstanding the termination of their employment (subject to the prorated adjustment described above) and (ii) the date on which a participant ceased to be an employee within the meaning of the plan in an attempt to expressly exclude any reasonable notice of termination period for the purposes of the prorated adjustment.

The Appellant argued that the accelerated end date of the performance cycle applied only to the RSUs granted to actively employed participants of the plan, such that the date of vesting of the Respondent’s RSUs remained unaffected (and was outside the reasonable notice period). The QCA dismissed this argument on the basis that the plan made no such distinction.

Moreover, the QCA set aside the plan’s exclusion of the reasonable notice of termination period in light of the fundamental principle imbedded in section 2092 CCQ pursuant to which an employee may not renounce their right to obtain an indemnity for any injury they suffer where insufficient notice of termination is given. As per applicable case law^[3], an employee whose employment is terminated without a serious reason and without prior notice is entitled to an indemnity in lieu of the compensation they would have received during the applicable reasonable notice period. Considering the 11-month reasonable notice period established in accordance with the Severance Policy, the QCA found that the Respondent was still a participant of the plan on the accelerated end date of the performance cycle, such that his RSUs became vested at the same time as those granted to the actively employed participants.

With respect to the prorated adjustment set out in the plan, the QCA found that it’s application in this specific case would be contrary to section 2092 CCQ as it would amount to a limitation of the Respondent’s right to receive an indemnity in lieu of the RSUs that would have vested during the reasonable notice of termination period. In this regard, the language of the plan documents was a determinative factor, as it led to the conclusion that the plan was a pecuniary benefit which formed part of the Respondent’s total compensation in respect of which the Respondent was entitled to be indemnified pursuant to sections 2091 and 2092 CCQ. The QCA reached this conclusion in light of the wording of (i) the RSU grant agreement which stated that the RSUs were a “component of [the Respondent’s] compensation package”, (ii) the plan’s objectives which were aimed at providing participants with an “additional incentive for their efforts” (i.e. a form of compensatory remuneration) and (iii) the provisions of the plan and of the Severance Policy which expressly stated that participants maintained their right to vest RSUs notwithstanding the termination of their employment. Moreover, it bears note that the number of RSUs granted to the Respondent during the course of his employment was determined in a manner proportionate to his annual salary, further suggesting that the RSUs were granted in compensation of the Respondent’s services.

The QCA went on to conclude that upon termination of employment without a serious reason, an employee’s rights under an equity-based compensation plan such as an RSU plan must be determined in light of both the wording of the plan and applicable law. While the ruling of the QCA was unfavourable to the Appellant in light of the relevant circumstances of this case, the QCA nonetheless confirmed that each case turns on its own set of facts.

Key Takeaways for Employers

Several lessons can be learned from the QCA’s judgment in this case. Failing meticulous planning, legal analysis and drafting when implementing equity-based compensation plans, employers could face unexpected costs upon termination of employment. Moreover, purchasers of a business should perform comprehensive due diligence of employment and compensation matters to ensure proper understanding of any potential post-closing exposure so as to implement the proper risk mitigation strategies prior to closing of the sale.  

In order to ensure optimal results and protection of their bottom line, employers should note the following when contemplating equity-based compensation plans:

• The plan should be drafted so as to clearly establish that the equity rights of participants are prospective in nature and granted solely as an retention incentive which can only be touched if a participant is actively employed and rendering services to the employer when the rights crystallize;
• The plan documents (such as the plan itself and the related grant agreements) should avoid any references suggesting that the equity rights are granted as a form of compensatory remuneration in payment of services rendered or as a form an “incentive” to perform; similarly, the plan should not be presented to a participant as a component of their total compensation package;
• Employers should avoid spreading relevant provisions across different documents and instead consolidate all relevant terms into the plan itself to ensure coherence and clarity, and review the terms of their template employment agreements to ensure harmony and coherence with the plan;
• The plan should contemplate, in distinct provisions, the vesting of equity rights by actively employed participants rendering services to the employer and non actively employed participants, distinguishing between participants whose employment terminates with or without a serious reason or by a voluntary resignation;
• Employers should always consult employment counsel with expertize in equity-based compensation plans before implementing the plan.