COMPLEXITY OF BONUSES

April 25, 2012

COMPLEXITY OF BONUSES:
COURT RULES ON THE ENTITLEMENT TO RESTRICTED SHARE UNITS

In a decision released on April 16, 2012, the Ontario Superior Court considered a claim by a former employee of the Bank of Montreal for payment of his bonus.  The plaintiff, an executive with BMO, had resigned his position.  He sued the bank for wrongful dismissal based on the allegation that he had been constructively dismissed.  The parties settled all issues other than the plaintiff’s entitlement to his 2011 bonus, and, in particular, how that bonus was to be paid.

Normally, the bonus was paid to employees in December of the current year or in January of the following year, for the entitlement which had accrued in the previous twelve months.  Prior to trial, the parties agreed that, if the bonus was payable, the quantum would have been $1,478,864.  While the bank acknowledged the quantum, it disputed the way in which it should be paid.  It took the position that, in accordance with past practice of the bank, two-thirds of the bonus was payable in cash, and one-third was to be paid in the form of Restricted Share Units (“RSU’s”).  In the normal course, the employee’s account in the share plan would be credited with a number of RSU’s equivalent to the number of BMO shares he could have purchased with one-third of his bonus.  This right was subject to certain restrictions.  Participants in the plan were entitled to cash in their units based on the prevailing market price after holding them for at least one year.  The amount which could be cashed in was limited to one-third of the total of the units in each calendar year.  Just prior to the hearing of the motion for judgment, the bank paid the plaintiff two-thirds of his bonus in cash, and indicated an intention to award the plaintiff the balance in RSU’s.  Therefore, the narrow issue before the court was whether the plaintiff was obligated to accept the balance of the bonus in RSU’s even though he was no longer employed by the bank, or could insist on payment in cash.  The provisions in the Omnibus Restricted Share Unit Plan, which governed the payment of the bonus and RSU’s, provided that, even if the employee was terminated without cause before all of his RSU’s had become cashable, he would be deemed to continue to be a participating employee for the purpose of the plan but would not “be entitled to participate in any further grant of RSU’s…from and after the date of such termination”.  Both sides relied on the wording of this clause as supporting their respective positions.  The plaintiff argued that, as former employees could no longer participate in the share plan, the bank could not pay the bonus through issuance of RSU’s.  The bank argued that the clause precluded a dismissed employee from requiring that a bonus be paid by RSU’s, but did not prevent the bank from paying the bonus in that fashion if it chose.
In accepting the bank’s interpretation, the court reasoned that nothing in the plan’s provisions expressly prohibited the bank from distributing RSU’s as the plain meaning of the provision only restricted the employee from demanding RSU’s.  As well, the court found that in fact the employee’s expectation was that he would receive a third of his bonus in RSU’s.  Finally, the court reasoned that to allow the employee to demand cash rather than RSU’s would put him in a better position than he would have been in had he not been terminated, in that he could receive cash for the value of the RSU’s immediately, rather than at the end of the applicable cash-in period.  As a result, the court rejected the plaintiff’s claim for cash payment of the value of RSU’s and dismissed the claim.  Although the plaintiff lost the case, he was not left penniless.  He was awarded closed to one million dollars in cash and would be credited with close to half a million dollars worth of RSU’s.
With the increasing popularity of non-cash compensation and in particular stock grants and stock options, employees should obtain detailed advice as to their rights and obligations under such plans.  Knowing the implications of continued employment, and discontinuation of employment, under the plan may affect an employee’s actions, both before and after accepting the job.

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