In O’Reilly v. Imax Corporation, 2019 ONSC 342, a court awarded an IMAX president two years of severance for wrongful dismissal. The president had worked for IMAX for 22 years, earning approximately $1.5 million a year, including $400,000 in commissions.
How the Court Calculated Severance
Because there was no employment contract with an enforceable termination clause, the judge took the following factors into consideration when determining how much severance the president was owed:
Character of employment;
Length of employment;
Age of the employee; and
Availability of similar employment having regard to the experience, training, and qualifications
Based on these criteria, the judge had to determine how long (the notice period) it would take the president to find a comparable job. After the notice period is determined, the court could then calculate how much money he would have earned over that time. Here are the reasons why the four factors are considered for determining the notice period and entitlement to severance:
A longer notice period will usually be justified for older long-term employees;
Generally, the longer the duration of employment, the longer the reasonable notice period;
A longer notice period is provided for senior management or highly skilled and specialized employees and a shorter period is provided for lower rank or unspecialized employees; and
Economic factors such as a downturn in the economy or in a particular industry or sector of the economy may indicate that an employee may have difficulty finding another position and may justify a longer notice period.
In the end, the judge determined a notice period of 22 months.
Severance Amount is Based on Total Compensation (Including Commissions)
To determine the exact amount of severance pay, the judge considered the president’s total compensation, not just his base salary.
One of the issues was whether the president would be owed his commissions he earned prior to his termination. IMAX argued that the commission policy stated that upon termination, the employee would only receive 50% of their earned but unpaid commissions. The judge did not buy this argument as the commission policy clearly stated that employees would only receive 50% of their commissions if the employees resigned. Since the president was dismissed, he was owed all commissions earned.
There was also a dispute about how to calculate the commissions he would have earned over the notice period to determine the total severance amount. The president wanted the severance commissions to be based on his last year average. IMAX wanted it to be based off of his last year, which were considerably lower. The judge ruled that the severance commissions should be calculated on the last year only, because the evidence showed that had he continue to work during the severance notice period, his commissions would have been similar to his last year’s earnings.
Regarding the president’s Restricted Stock Units and stock options, the court found that the agreements regarding these stock plans did not appropriately remove the president’s rights to stock options during the notice period. As a result, the judge awarded the president the value of the loss of the stock options, which was calculated on the basis of what would have probably happened had the president been employed during the notice period and how he would exercise his grants.
Other types of compensation that the judge awarded was the loss of health benefits, pension contributions, and car allowance.
The total severance amount owed was not provided by the court, but could be well over $1 million based on the president’s total compensation, including base salary, commissions, and stock options.
Employer Errors:
Having long term employees is definitely a good sign for employers, it means retention of quality, reliable talent. However, most good things come to an end, including employment at times. There are ways to ensure top talent is retained but that the business is adequately covered. Otherwise, severance can be substantial. Some ways to manage severance risks is to have good contracts, provide notice periods less than the common law, and having clearly drafted bonus plans to ensure that bonuses or commissions are not payable upon termination.
Employee Education:
Employees should always know that their entitlement to severance is not just based on their base salary. Severance usually includes total compensation, including commissions, bonus, long term incentive plans, stock options, car allowance, health benefits, and others.
If you are an employer or employee who has questions about workplace issues such as terminations, severance or notice periods, please contact Toronto employment lawyer Jason Wong at 647-242-5961 or jason@wongemploymentlaw.com