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‘Active employment’ requirement in bonus plans revisited – an issue of good faith?
February 15, 2017
Author(s): Andrew R. McDaniel

In a previous article, we noted that the ‘active employment’ requirement in an employee bonus plan had been found not to preclude a dismissed employee from receiving a bonus during the reasonable notice period. A recent decision of the Alberta Court of Appeal, however, finds that such an entitlement is not automatic and remains dependent on the wording of the contract.

David Styles was employed by the Alberta Investment Management Corporation for three years prior to being terminated without cause. Styles’ employment was governed by a written employment contract, which provided for a base salary plus potential bonuses. One of these potential bonuses could be earned pursuant to a Long Term Incentive Plan. Under this Plan, a bonus could be generated on a four year cycle by earning annual grants. The Plan was clear that no bonus became payable for at least four years, and it was only at that time that the value of the annual grants could be calculated. In order to be eligible for a bonus, the participant had to be an active employee on the bonus vesting date – i.e., at the end of the four year cycle. The Plan also made clear that any period of reasonable notice in lieu of termination did not qualify as active employment.

Styles was employed less than four years and was not actively employed on the date the bonuses vested. At trial, the Court found that the bonuses were payable under the Plan. According to the trial judge, the terms of the Plan gave the appellant a discretion to forfeit a grant if an employee was not actively employed, and that this discretion must be exercised “fairly and reasonably” under the common law duty of good faith in the performance of contracts.

The Alberta Court of Appeal disagreed, finding that the contract was clear and should be interpreted according to its language. On a plain reading of the Plan, it did not create an element of discretion in denying grants to employees who were no longer actively employed. Properly interpreted, the Court found that there was no right to receive a bonus unless the respondent was actively employed on the vesting date.

The Court of Appeal also took the opportunity to address the common law duty of good faith in the performance of contracts and what it does not include. For instance, the duty does not extend to an employer’s reasons for terminating a contract of employment, as this would undermine the right of an employer to determine the composition of its workforce. The duty also does not extend to provide a reasonable exercise of discretionary contractual power, as relied on by the trial judge. The Court makes clear that the duty of good faith simply means that “…parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of that contract”. This is a narrow concept, and does not create a duty of loyalty, disclosure, forgoing contractual advantages, or a general principle of the reasonable exercise of a discretion. Lastly, the principle of good faith relates to the performance of a contract, not to its negotiation or terms. The principle does not invite a court to examine the terms of a contract to decide if they are honest, negotiated in good faith, and much less whether they are fair and reasonable. Unless a contract reaches the level of being unconscionable or is contrary to public policy, it is to be enforced in accordance with its terms.

This case reaffirms the importance of ensuring contractual documents, including bonus plans, are worded carefully and utilize unambiguous language. They will be interpreted by a Court by reference to their plain meaning. The case also establishes that a properly worded bonus plan can reference and rely upon active employment as a required element for the receipt of a bonus payment.

Styles v. Alberta Investment Management Corporation, 2017 ABCA 1

Questions about the content of this article may be directed to Andrew McDaniel.