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Burying Termination Provisions in Employment Documents can Backfire

Opinion/
Sep 9, 2020
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A recent Ontario Superior Court of Justice decision shows that employers, if they want to enforce harmful termination or forfeiture provisions in equity-based incentive plans documents, have to properly notify the employee that they are entering into such a contract.

While this conclusion is just, fair, and principled, I would have preferred that the judgment had spelled out exactly what is required in this situation. The decision does however raise a broader question of what employers should be required to do in all instances where termination provisions are involved.

The case involved Fransic Battiston who was employed by Microsoft Canada Inc. for almost 23 years until his termination without cause in 2018. In addition to his base salary, he received benefits each year, including merit increases, cash bonus and stock awards, with these bonus payments constituting about 30 per cent of his total compensation. 

When he was terminated, Battiston was advised that he would receive no merit increase and no cash bonus for that year, plus he would no longer be entitled to the vesting of any granted but unvested stock awards. He was told this because Microsoft relied on provisions in equity plans that seemed to limit Battiston’s entitlements to these things if his employment were ever terminated.

Limits on stock awards

According to the judgment, each year when Battiston received his stock awards, he would receive these in an email and click “I agree.” The email stated, one year: “Congratulations on your recent stock award! To accept this stock award, please go to My Rewards and complete the online acceptance process. A record will be saved indicating that you have read, understood and accepted the stock award agreement and the accompanying Plan documents. Please note that failure to read and accept the stock award and the Plan documents may prevent you from receiving shares from this stock award in the future.”

Any employee who had gone to My Rewards would have seen that a clause that stipulated in very clear language that, if the employee is terminated, a series of important rights are lost. For instance, instead of seeing options vest over a period of notice (notice is by default required at law), and options yet to vest would simply be forfeited if Microsoft ends the relationship. Microsoft submitted that Battiston was not entitled to damages for the loss of these to-be vested options because he had agreed to those conditions. Battiston countered that he did not read these termination provisions nor did Microsoft draw his attention to them, so he was entitled to stock awards during the notice period.

Many people don’t read the fine print

The court took his side, citing the book, The Law of Contracts which noted: “In many contractual settings, it will not be expected that a signing party will take time to read the agreement. Even if the document is read, it may well be, especially in the context of consumer transactions, the purport of particular provisions of the agreement will not be understood by the signing party.” The judgment also referenced a 1978 Ontario Court of Appeal case where the court refused to enforce a limitation of liability provision in a car rental agreement since “such a rental transaction was typically concluded in a ‘hurried, informal manner’ … something more should be done by the party submitting the contract for signature than merely handing it over to be signed … namely, (emphasis added by the court) reasonable measures must be taken to draw harsh and oppressive terms to the attention of the other party.”

I applaud the judge in the Battiston case for saying that unless express notice is given about what are very harsh limitation, termination or forfeiture provisions, they should not be enforceable. I just would have preferred that he had given a clear example of what that notice should look like. In other words, the decision is correctly decided but offers little guidance as to what will “do the trick” going forward.

Termination and forfeiture provisions must be clear

I believe such notice should be in plain English and delivered to employees both verbally and in printed form. In each case, the employer should clearly detail what l happens to stock holdings if the person’s position is terminated. The employee should be told that, absent these provisions, they have very different rights and should consider what they are doing.

And of course, employees should be advised to consult a labour lawyer if they are uncertain about any aspect of the agreement, which is good advice at any stage of workplace negotiations.

There are other issues raised by this decision. The one that comes to mind is that if there is any element of a contract of employment that may be considered onerous upon the employee’s termination, that should in my view be discussed openly upon hiring. I’m thinking of language that we do see increasingly in contracts, such as (to paraphrase) “We can fire you by giving you minimum notice.” New employees, grateful for a job and unaware of their rights to what is known as “common law notice” (an amount that usually far exceeds minimum or statutory notice), may sign on without noticing or caring about these terms, but that is just wrong. Terms like that must be flagged to employees to ensure they understand how it may affect them in the future.

The language used in employment contracts must always be clear and understandable to both parties. I’m glad to see that in this case the court found the termination provisions in the stock award agreements were “harsh and oppressive as they precluded Battiston’s right to have unvested stock awards vest if he had been terminated without cause.”

This case should be a wake-up call to employers who think they can bury loaded language in contracts, and trust that people will not bother to read it. As this decision shows, the court can step in and protect workers in such a situation.

A copy of the online article can be found HERE.

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