Dismissal Planning and Stock Options

It’s best to have employment contracts with employees to clearly set out the severance package that an employee will be entitled to if an employer makes the decision to terminate without cause

Many, if not most, publically traded companies have historically offered stock options as part of their compensation packages for executives and other employees. Where there is no employment contract in place that clearly defines the severance package available to an employee terminated without cause, a terminated employee’s severance entitlement under common law will include all salary, bonuses and other benefits that the terminated employee would have been entitled to had they remained as employees throughout a reasonable notice period. [See Nygard International Ltd. v. Robinson (1990), 46 B.C.L.R. (2d) 103 (C.A.); and Iacobucci v. WIC Radio Ltd., (1999), 72 B.C.L.R. (3d) 234 (C.A.)]. Employers without employment agreements have relied on the express wording of their stock option plan (“SOP”) to determine what stock option rights an employee would have upon termination. That presumption now requires re-examination in light of the January 2009 British Columbia Court of Appeal decision in Saalfeld v. Absolute Software Corporation, 2009 BCCA 18.

Absolute Software Corporation (“Absolute”) hired Saalfeld on November 13, 2006 to sell its software products; the parties did not have an employment contract. As part of Saalfeld’s compensation, she was granted 5,000 stock options which vested at a rate of 1,250 per year. Saalfeld was dismissed without cause on July 24, 2007 and paid one week pay in lieu of notice of the termination. At trial, the court found that the reasonable notice period was five months. The issue before the BC Court of Appeal was whether or not Saalfeld was entitled to damages for the loss of the stock options.

Absolute did not dispute that such options would have vested during the five month ‘reasonable notice’ period, however it did argue that, based on the plain wording of its SOP, Saalfeld was not entitled to exercise the options. Absolute’s SOP stated that no stock options could be exercised by an officer or employee after 5:00 pm on “the last day on which the Officer or Employee worked for the Company.” Absolute’s SOP defined this phrase as “either the day specified by the company in writing to the employee as being the last day on which the employee is to work for the company; or, if the employee was given pay in lieu of notice, the day on which such notice of termination is given by the company to the employee”. Absolute argued that Saalfeld was not entitled to exercise the 1,250 stock options after the date that notice was given, as the wording of its SOP provided that an employee’s entitlement to options ceased on the notice date, regardless of the length of notice given or pay in lieu. Thus, Absolute argued that Saalfeld was not entitled to damages for loss of the stock options.

Both the trial and appeal courts disagreed with Absolute’s arguments and instead ruled that since the SOP referred the date the employment “terminated”, that term should be interpreted to mean “lawfully terminated” by the company. The court accepted Saalfeld’s argument that since she was entitled to five months notice of termination, Absolute did not “lawfully terminate” her employment, nor could there be a lawful termination until December 24, 2007, five months after the date she was notified her employment would end (even if Absolute had paid the full five months pay upon termination, and despite the clear wording in the SOP that termination also meant the day notice was given if pay in lieu of notice was paid).

Whether or not you agree with the court’s interpretation of the Absolute’s SOP, there are a few principles that we can take from this case. First, the courts in this case affirmed the right of employers and employees to enter into employment agreements which would limit common law rights to damages flowing from termination without cause and without reasonable notice. As long as the employment contract contains at least the minimum severance rights as determined by the Employment Standards Act, the severance rights in the employment agreement will govern (even if the wording in an SOP would have resulted in rights to the company’s stock upon termination). The second principle affirmed in this decision is that absent an employment contract, an offer of pay in lieu of notice (even if fair and generous) will not render a termination without cause, lawful. Both principles reinforce, once again, the benefits of having employment contracts with employees to clearly set out the severance package that an employee will be entitled to if an employer makes the decision to terminate without cause.