Profit Sharing & Pink Slips: When Termination Blurs the Lines

The termination of an employment contract without cause is a common occurrence in the business world. However, the legal ramifications of such terminations, particularly when coupled with shareholder agreements, can be complex. The recent Alberta Court of Appeal case, Kirke v. Spartan Controls Ltd., provides valuable insight into how courts navigate these intricate situations, specifically addressing the interplay between wrongful dismissal damages and shareholder profit-sharing programs.

Reasonable Notice and its Implications

At the heart of wrongful dismissal law lies the principle of reasonable notice. Employers have the right to terminate employment contracts without cause, but they must provide reasonable notice or compensation in lieu of notice. Failure to do so constitutes a breach of contract, entitling the employee to damages. The Kirke case centred around a summary trial decision assessing the damages owed to the employee, Bruce Kirke, whose employment with Spartan Controls Ltd. was terminated without cause. The trial judge determined a reasonable notice period was 20 months, a finding that was not challenged on appeal. The central dispute revolved around whether the employee’s damages should include payments he received through the employer’s optional shareholder profit sharing program.

The SHPS Program: Compensation or Investment?

The shareholder profit sharing (SHPS) program at Spartan Controls allowed eligible employees to purchase shares in the parent company, Spartech 1991 Limited. These shares provided employees with payments tied to company profitability. The critical question in Kirke was whether these SHPS payments constituted part of the employee’s compensation or were solely a return on his investment as a shareholder. This distinction was crucial because if the SHPS payments were considered compensation, they would likely be included in the calculation of wrongful dismissal damages.

The Impact of the Unanimous Shareholder Agreement

A key element of the case was the Unanimous Shareholder Agreement (USA) signed by the employee. This agreement contained provisions that allowed the employer to buy back employee-owned shares under certain conditions, including termination of employment. The USA stipulated a 90-day notice period for such buybacks. This provision became a focal point of the legal arguments, as the employer argued that it limited the employee’s entitlement to SHPS payments during the reasonable notice period.

The summary trial judge found that the SHPS payments were part of the employee’s compensation. However, due to the buyback provisions in the USA, the judge limited the employee’s damages for lost SHPS payments to the 90-day period stipulated in the agreement. This decision led to appeals from both parties.

Determining Whether a Benefit Should Be Included in Wrongful Dismissal Damages

The employee appealed the decision, arguing that the USA did not unambiguously limit his right to compensation for lost SHPS payments and that the share buyback constituted oppressive conduct. The employer cross-appealed, claiming that the SHPS payments were not part of the employee’s compensation and should not be included in the damage calculation.

The Court of Appeal’s analysis was guided by the Supreme Court of Canada’s decision in Matthews v. Ocean Nutrition Canada Ltd. The Matthews case established a two-part test for determining whether bonuses and other benefits should be included in wrongful dismissal damages:

1. Would the employee have been entitled to the bonus or benefit during the reasonable notice period?
2. Do the terms of the employment contract or bonus plan unambiguously remove or limit that common law right?

The Importance of Contractual Clarity & The Share Buyback Provision

The Court of Appeal upheld the trial judge’s finding that the SHPS payments were part of the employee’s compensation. The Court emphasized that eligibility for the SHPS program was tied to the employee’s employment relationship with Spartan Controls. However, the Court also agreed that the Unanimous Shareholder Agreement (USA), specifically the 90-day buyback provision, unambiguously limited the employee’s entitlement to SHPS payments during the reasonable notice period. The Court stressed the importance of clear and unambiguous contractual language in limiting common law rights. Because the USA clearly gave the employer the right to buy back shares with 90 days’ notice, the Court found no reason to interfere with the trial judge’s decision.

Addressing the “Oppression” Argument: Reasonable Expectations and Contractual Rights

The employee argued that the share buyback was oppressive and in bad faith. The Court of Appeal rejected this argument, emphasizing that the concept of “reasonable expectations” is objective and contextual. The Court found the employee had failed to establish any reasonable expectation that his shares would not be subject to the buyback provision upon termination, particularly given the consistent practice of requiring employees to sell their shares upon departure. The Court also noted the absence of any evidence of abusive or unfair conduct on the employer’s part. The Court clarified that the Supreme Court of Canada’s decision in Matthews did not introduce a general good faith obligation that could override the clear contractual rights outlined in the Unanimous Shareholder Agreement.

The Hamilton Principle: Least Onerous Performance

The Court of Appeal also addressed the trial judge’s reliance on the principle from Hamilton v. Open Window Bakery Ltd., a 2004 decision of the Supreme Court of Canada. This principle states that when a contract has multiple performance options, the least burdensome option for the defendant should be considered. The Court of Appeal found that the trial judge’s application of Hamilton was correct in this context. Given the unambiguous language of the Unanimous Shareholder Agreement, the least burdensome way for the employer to fulfill its reasonable notice obligation was to allow the employee to retain his shares and receive SHPS payments for the 90-day buyback period.

Implications for Alberta Employers and Employees

The Kirke case offers several essential takeaways for both employers and employees in Alberta.

Contractual Clarity is Paramount

The case underscores the critical importance of clear and unambiguous language in employment contracts and shareholder agreements. Vague or ambiguous language can lead to disputes and unpredictable outcomes. Employers should ensure that their contracts clearly define the terms of compensation, including any profit-sharing or share ownership programs, and explicitly address the implications of termination on these programs.

Shareholder Agreements and Wrongful Dismissal

When employees are also shareholders, their rights and obligations are governed by both their employment contracts and shareholder agreements. These agreements must be carefully considered in the context of wrongful dismissal. Employers should be aware that provisions in shareholder agreements, such as buyback clauses, can impact the calculation of wrongful dismissal damages.

Reasonable Expectations and Oppression

While reasonable expectations are relevant in assessing oppression claims, they cannot override clear contractual rights. Employees should carefully review all agreements and understand the potential consequences of termination on their share ownership and related benefits.

Contact DBB Law in Calgary for Employment Law & Wrongful Dismissal Advice

The Kirke case highlights the delicate balance between protecting employee rights in wrongful dismissal situations and upholding the enforceability of contractual agreements, particularly shareholder agreements. At DBB Law, our skilled labour and employment lawyers advise employers and employees on agreements governing all elements of the employment relationship and help parties navigate the complex intersection of employment law and shareholder rights. We provide personalized, robust legal solutions that deliver results for unionized and non-unionized businesses and workers throughout Alberta.

DBB Law offers full-service legal strategies to clients in a broad range of practice areas, including labour and employment law, tax law, civil litigation, and business and commercial law. To discuss your matter with a member of our team, please contact us online or call 403-265-7777.