A Different Type of Forfeiture Case
Last week, the Ontario Court of Appeal released its decision in Manastersky v. Royal Bank of Canada.
Mr. Manastersky was entitled to an 18 month notice period, and the appeal turned on certain entitlements under a variable compensation plan known as the 'Mezzanine Carried Interest Plan', in which he participated for the last ~9 years of his employment.
The Mezzanine CIP is complicated. If I'm understanding it correctly, RBC established two investment funds under the plan, and allocated a certain number of 'points' to Mr. Manastersky, which would result in entitlements based on the growth of those funds over time. The plan also contemplated the possible establishment of a third fund after the investment period for the first two ended - which, under the terms of the plan, would begin automatically, unless otherwise terminated by RBC.
Mr. Manastersky was dismissed in February 2014, when the second fund was approaching the end of its investment period. Around the same time, the decision was made not to establish a third fund and to discontinue the CIP, and the CIP began to be wound down in June 2014. So while RBC paid Mr. Manastersky his full entitlements pursuant to his participation in the first two funds (all of which were fully vested at the time of his termination), RBC took the position that no further entitlements would accrue during the notice period under the CIP.
The majority of the Court of Appeal accepted RBC's position on the point: It had the contractual right to terminate the CIP, and to elect not to establish a third fund, and it exercised that right.
Justice Feldman dissented: While RBC may have had the contractual right to terminate the CIP (though there's some interesting commentary that, on its own, this may have constituted a constructive dismissal), it had not done so as at the date of termination.
This is certainly a close case. Calculation of damages based on variable compensation components has always been challenging, and you see a number of permutations of this issue.
On the one hand, you see employees who have consistently earned a significant premium in overtime pay over the course of years, and who are then dismissed. The employer then argues "I could have kept her on and not given her any overtime." This argument is usually not successful - the hypothetical "I could have done this, even though I never did during the relationship" is not seen as indicative of what the employee would have earned through a period of working notice.
On the other hand, you get formulaic profit-sharing bonuses, and scenarios where employers argue that nobody got the bonus in a given time period, and therefore the dismissed employee wouldn't have gotten it either had she still been employed. That has a higher chance of success.
There is a good, clean logic to the majority decision: Mr. Manastersky received his full entitlement under the CIP, and there's no part of his contract that entitled him to anything further, even if he continued working over the notice period.
However, Justice Feldman's dissent resonates, too. Part of the test for including these components in wrongful dismissal damages is that they constituted an 'integral' component of the compensation package. It's not a high test, but even where employers have a degree of discretion, they don't exercise that discretion charitably. Your employer isn't paying you a bonus 'to be nice'; it's paying you a bonus because it regards that payment as necessary to keep your compensation competitive, and to keep you motivated to produce. Had he continued working, the reasonable expectation would be that, even if the CIP were discontinued, it would be replaced by some other opportunity to earn a comparable amount. (Whether or not an 'integral' component of the compensation package can be removed without amounting to a constructive dismissal, even if there are contractual documents permitting the employer to unilaterally discontinue it, is a much more difficult question.)
On these facts, the notion that an ex post facto termination of the CIP can insulate RBC from payment of damages in respect of benefits that may otherwise have accrued thereunder...seems to render an injustice.
And I would respectfully suggest that the majority here erred by failing to recognize that damages, in a wrongful dismissal action, are assessed as at the date of breach, based on certain presumptions, such as the ability to work through the notice period. This is one of the more difficult propositions in wrongful dismissal law, for reasons touched upon by Master Robertson in Toole v. Northern Blizzard Resources Inc.:
That case dealt with a scenario where an employee sought payment in respect of a bonus during the reasonable notice period, where the bonus was taken from a 'bonus pool' which - due to poor performance of the company on the whole - was fixed at zero during applicable periods. (The case fell into a grey area between formula-driven profit-sharing cases, and cases where the bonus is based more significantly on achievement of personal targets.)
There's an important question of principle here: How do we determine which post-termination events are relevant to the assessment of damages, and which are not?
Of Master Robertson's listed events, they actually break down cleanly into two categories: Mitigation, and special damages. I'm not sure those are comprehensive categories of post-termination events relevant to damages, but they're the two most obvious.
Actual mitigation of losses, failure to mitigate losses, and reasonable cost of mitigation are clear instances where the calculation of damages will be influenced. But the thing about mitigation is that, analytically, its effect is determined after assessing damages, and the burden of proof is reversed on most mitigation issues. (There are a couple of cases that have found that a dismissed employee must lead evidence to establish a lack of mitigation earnings, as a prerequisite to establishing damages in the first place. I would argue that those cases are wrongly decided - a discussion for another day.) While not popular in Alberta, other jurisdictions (including Ontario) tend toward a 'trust and accounting' approach, allowing a dismissed employee to seek and obtain judgment while the notice period is ongoing, subject to an ongoing obligation to account for mitigation earnings received later in the notice period.
Special damages, in this context, will usually mean establishing losses that would have been covered under a group benefits plan: "I lost my drug plan, so I had to pay for this medication out of my own pocket." Simple stuff, though the numbers can occasionally be very significant.
Yet there are other categories. Consider, for instance, a case I previously discussed, which is currently pending before the Supreme Court of Canada, Matthews v. Ocean Nutrition: In that case, Mr. Matthews is seeking the value of a contingent benefit that, he argues, would have become payable during the reasonable notice period.
Or is that a different category at all? Is a contingent benefit under a long term incentive plan, for present purposes, really so different from a long term disability policy that pays out in the event the employee becomes disabled? They are both contingent benefits, in respect of which an employee may (or may not) be entitled to damages flowing from their loss, but for which the quantum of damages so flowing is incalculable at the point of termination.
While it hasn't been parsed in the case law on this level, I would suggest that this is the distinction: If the value of a lost benefit can be reasonably determined as at the point of termination, it should be. If the nature of the loss is contingent on subsequent events not entirely within the control of the parties - and which may or may not still occur after termination (without being caused or precluded by termination) - then the assessment of the actual value of that benefit must occur later.
Therefore, a strictly formula-driven profit-sharing plan only has value with reference to the company's profits over the applicable period, which are presumably not knowable at the point of termination. By contrast, a performance-driven incentive bonus, depending less on company profits and more on achievement of personal performance goals, does not refer to post-termination contingencies, and should be assessed at the point of termination based on past practices.
Applying the concept to this case, we can still see why this case is a close one, but ultimately the CIP should be treated as a non-contingent benefit, for one simple reason: Even if the CIP were extended, and a third fund were established, Mr. Manastersky's entitlement under it would still not be calculable. (RBC's position that Mr. Manastersky had no entitlement at all, in that scenario, would be quite tenuous. Yet without any presumptive allocation of 'points' in the third fund, we still wouldn't be able to calculate, on an ex post facto basis, what benefit would have accrued to Mr. Manastersky under such a fund.)
To be clear, however, it is only the value of a contingent entitlement, and not the entitlement itself, which is reasonably calculated on an ex post facto basis. In the ordinary course, an employee entitled to reasonable notice at common law will be entitled to compensation for the loss of his or her benefit plan - whether that loss is a $200,000 disability claim; a $1,000 dental claim; or nothing at all. In the event, however, that an employer terminated its group benefits coverage for everyone else after dismissing the employee in question, it is almost certainly the case that the employee's claim would be premised on the continuation of his benefit plan through the reasonable notice period nonetheless.
The first question, in the Manastersky case, should have been "Is Mr. Manastersky entitled to the value of his participation in the CEP through the reasonable notice period?" - a question which I would suggest should have been assessed as at the point of termination, with an answer that was clearly 'yes' at that juncture. The second question should have been the value of that entitlement, and my respectful view is that this is not a case where the calculation should have integrated ex post facto considerations.
*****
Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
Mr. Manastersky was entitled to an 18 month notice period, and the appeal turned on certain entitlements under a variable compensation plan known as the 'Mezzanine Carried Interest Plan', in which he participated for the last ~9 years of his employment.
The Mezzanine CIP is complicated. If I'm understanding it correctly, RBC established two investment funds under the plan, and allocated a certain number of 'points' to Mr. Manastersky, which would result in entitlements based on the growth of those funds over time. The plan also contemplated the possible establishment of a third fund after the investment period for the first two ended - which, under the terms of the plan, would begin automatically, unless otherwise terminated by RBC.
Mr. Manastersky was dismissed in February 2014, when the second fund was approaching the end of its investment period. Around the same time, the decision was made not to establish a third fund and to discontinue the CIP, and the CIP began to be wound down in June 2014. So while RBC paid Mr. Manastersky his full entitlements pursuant to his participation in the first two funds (all of which were fully vested at the time of his termination), RBC took the position that no further entitlements would accrue during the notice period under the CIP.
The majority of the Court of Appeal accepted RBC's position on the point: It had the contractual right to terminate the CIP, and to elect not to establish a third fund, and it exercised that right.
Justice Feldman dissented: While RBC may have had the contractual right to terminate the CIP (though there's some interesting commentary that, on its own, this may have constituted a constructive dismissal), it had not done so as at the date of termination.
Commentary
This is certainly a close case. Calculation of damages based on variable compensation components has always been challenging, and you see a number of permutations of this issue.
On the one hand, you see employees who have consistently earned a significant premium in overtime pay over the course of years, and who are then dismissed. The employer then argues "I could have kept her on and not given her any overtime." This argument is usually not successful - the hypothetical "I could have done this, even though I never did during the relationship" is not seen as indicative of what the employee would have earned through a period of working notice.
On the other hand, you get formulaic profit-sharing bonuses, and scenarios where employers argue that nobody got the bonus in a given time period, and therefore the dismissed employee wouldn't have gotten it either had she still been employed. That has a higher chance of success.
There is a good, clean logic to the majority decision: Mr. Manastersky received his full entitlement under the CIP, and there's no part of his contract that entitled him to anything further, even if he continued working over the notice period.
However, Justice Feldman's dissent resonates, too. Part of the test for including these components in wrongful dismissal damages is that they constituted an 'integral' component of the compensation package. It's not a high test, but even where employers have a degree of discretion, they don't exercise that discretion charitably. Your employer isn't paying you a bonus 'to be nice'; it's paying you a bonus because it regards that payment as necessary to keep your compensation competitive, and to keep you motivated to produce. Had he continued working, the reasonable expectation would be that, even if the CIP were discontinued, it would be replaced by some other opportunity to earn a comparable amount. (Whether or not an 'integral' component of the compensation package can be removed without amounting to a constructive dismissal, even if there are contractual documents permitting the employer to unilaterally discontinue it, is a much more difficult question.)
The Relevance of Post-Termination Events to Damages
On these facts, the notion that an ex post facto termination of the CIP can insulate RBC from payment of damages in respect of benefits that may otherwise have accrued thereunder...seems to render an injustice.
And I would respectfully suggest that the majority here erred by failing to recognize that damages, in a wrongful dismissal action, are assessed as at the date of breach, based on certain presumptions, such as the ability to work through the notice period. This is one of the more difficult propositions in wrongful dismissal law, for reasons touched upon by Master Robertson in Toole v. Northern Blizzard Resources Inc.:
In a wrongful dismissal claim, there are many questions that must be asked to allow a proper assessment of damages. Did he find a job? What is the compensation for it? Did he refuse to try to mitigate his damages by looking for work when it should have been available? Did he incur costs in his attempts at mitigation? Was he able to replace his group benefits at no or little cost by being added to his wife’s benefit plan with her employer? Did he need dental work that was no longer covered by a dental plan and exceeded the premiums paid for the benefit? Did he die or become disabled without life or disability insurance during the reasonable notice period, after his entitlement to the group insurance coverage was cancelled? One can imagine all sorts of post-termination events that inform the assessment of damages.
That case dealt with a scenario where an employee sought payment in respect of a bonus during the reasonable notice period, where the bonus was taken from a 'bonus pool' which - due to poor performance of the company on the whole - was fixed at zero during applicable periods. (The case fell into a grey area between formula-driven profit-sharing cases, and cases where the bonus is based more significantly on achievement of personal targets.)
There's an important question of principle here: How do we determine which post-termination events are relevant to the assessment of damages, and which are not?
Of Master Robertson's listed events, they actually break down cleanly into two categories: Mitigation, and special damages. I'm not sure those are comprehensive categories of post-termination events relevant to damages, but they're the two most obvious.
Actual mitigation of losses, failure to mitigate losses, and reasonable cost of mitigation are clear instances where the calculation of damages will be influenced. But the thing about mitigation is that, analytically, its effect is determined after assessing damages, and the burden of proof is reversed on most mitigation issues. (There are a couple of cases that have found that a dismissed employee must lead evidence to establish a lack of mitigation earnings, as a prerequisite to establishing damages in the first place. I would argue that those cases are wrongly decided - a discussion for another day.) While not popular in Alberta, other jurisdictions (including Ontario) tend toward a 'trust and accounting' approach, allowing a dismissed employee to seek and obtain judgment while the notice period is ongoing, subject to an ongoing obligation to account for mitigation earnings received later in the notice period.
Special damages, in this context, will usually mean establishing losses that would have been covered under a group benefits plan: "I lost my drug plan, so I had to pay for this medication out of my own pocket." Simple stuff, though the numbers can occasionally be very significant.
Yet there are other categories. Consider, for instance, a case I previously discussed, which is currently pending before the Supreme Court of Canada, Matthews v. Ocean Nutrition: In that case, Mr. Matthews is seeking the value of a contingent benefit that, he argues, would have become payable during the reasonable notice period.
Or is that a different category at all? Is a contingent benefit under a long term incentive plan, for present purposes, really so different from a long term disability policy that pays out in the event the employee becomes disabled? They are both contingent benefits, in respect of which an employee may (or may not) be entitled to damages flowing from their loss, but for which the quantum of damages so flowing is incalculable at the point of termination.
While it hasn't been parsed in the case law on this level, I would suggest that this is the distinction: If the value of a lost benefit can be reasonably determined as at the point of termination, it should be. If the nature of the loss is contingent on subsequent events not entirely within the control of the parties - and which may or may not still occur after termination (without being caused or precluded by termination) - then the assessment of the actual value of that benefit must occur later.
Therefore, a strictly formula-driven profit-sharing plan only has value with reference to the company's profits over the applicable period, which are presumably not knowable at the point of termination. By contrast, a performance-driven incentive bonus, depending less on company profits and more on achievement of personal performance goals, does not refer to post-termination contingencies, and should be assessed at the point of termination based on past practices.
Applying the concept to this case, we can still see why this case is a close one, but ultimately the CIP should be treated as a non-contingent benefit, for one simple reason: Even if the CIP were extended, and a third fund were established, Mr. Manastersky's entitlement under it would still not be calculable. (RBC's position that Mr. Manastersky had no entitlement at all, in that scenario, would be quite tenuous. Yet without any presumptive allocation of 'points' in the third fund, we still wouldn't be able to calculate, on an ex post facto basis, what benefit would have accrued to Mr. Manastersky under such a fund.)
To be clear, however, it is only the value of a contingent entitlement, and not the entitlement itself, which is reasonably calculated on an ex post facto basis. In the ordinary course, an employee entitled to reasonable notice at common law will be entitled to compensation for the loss of his or her benefit plan - whether that loss is a $200,000 disability claim; a $1,000 dental claim; or nothing at all. In the event, however, that an employer terminated its group benefits coverage for everyone else after dismissing the employee in question, it is almost certainly the case that the employee's claim would be premised on the continuation of his benefit plan through the reasonable notice period nonetheless.
The first question, in the Manastersky case, should have been "Is Mr. Manastersky entitled to the value of his participation in the CEP through the reasonable notice period?" - a question which I would suggest should have been assessed as at the point of termination, with an answer that was clearly 'yes' at that juncture. The second question should have been the value of that entitlement, and my respectful view is that this is not a case where the calculation should have integrated ex post facto considerations.
*****
Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
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