Monday, March 7, 2011

When Does Employment End?

An employee is dismissed without just cause, and without notice.

This is a breach of contract. The employer has no right to do so, and so the Court will award damages in the form of pay in lieu of notice.

In the vast majority of cases, this is primarily salary in lieu of notice. Frequently there is some allocation for non-cash benefits that would have been received through the notice period, but this is usually marginal, a small percentage of the overall sum.

Except when we're talking about equities. Stock options, share repurchase agreements, etc. These are the "big money" cases in employment law, because occasionally, as in the case of Love v. Acuity Investment Management Inc. recently before the Court of Appeal, something happens with immense value consequences, such as the value of equities changes dramatically over the course of the notice period.

(Another case from not so long ago involved Research in Motion and a stock option vesting date which occurred during the notice period. The value was in the millions.)

Mr. Love had purchased 2% of the equity in Acuity, paying $360,000, and part of this involved an agreement which allowed Acuity to repurchase the equity at the end of his employment. He was terminated several months later, and Acuity chose to exercise the repurchase option, which at that date had a value of $807,000. In the months following the termination, Acuity continued to grow at an astonishing rate.

Suddenly, salary becomes a very small part of the notice period, as his equity in the company was growing at a pace that created income dwarfing any salary. The further out the notice period extends, the greater his equity. On a six-digit scale. Huge.

One problem: The share repurchase option is triggered at the date at which he ceased to be an employee. So Acuity took the position that the valuation date is the termination date. This, regardless of the fact that it terminated without notice, which it had no right to do.

Love, on the other hand, argued that the employment relationship, at law, terminates at the end of the reasonable notice period, so that should be the valuation date.

That's questionable, too. A bit simplistic, I think. It's a fairer statement of the law to say that an employee is entitled to be compensated for everything he would have received had the employment relationship been continued through the notice period. An important nuance, perhaps.

The Court of Appeal held that the employment actually terminated on the termination date, and that the language of the share repurchase agreement holds up, and so the valuation date is the termination date. This may well be a literally correct interpretation of the repurchase agreement, but it shouldn't be the end of the analysis, given the most fundamental tenets of employment law.

Far be it from me to disagree with the Court of Appeal, but I do. The preferable analysis here is this:

Yes, the employment ended as of the termination date. This did have the effect of triggering Acuity's right to repurchase the shares. And they did so.

But...because the actual termination without notice was a contractual breach, his damages are to be calculated on the basis of what he would have received had actual notice been given - he suffered a compensable loss by losing the entitlement to keep his equity shares until the end of the notice period, and is entitled to be compensated for that loss.

That's my humble view, at least. Given that it conflicts with the views of the Ontario Court of Appeal, however, my view does not reflect the state of the law in Ontario.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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