The Little-Known Dangers of Incentive Plans: Employer Held Liable for Amount It Never Agreed to Pay
Imagine a scenario where you are a fair and generous employer with a long-term incentive plan to reward good performance. You do not want to pay awards to employees after their employment ends, and so you make everyone sign a plan document stating that they must remain an employee to be eligible for an incentive payment. For whatever reason, you later determine it’s necessary to let one of your lowest performers go. When it comes time to pay out incentive awards months later, surely you would not be required to pay one to this former employee, right? Well, not necessarily.
The recent Alberta Court of King’s Bench decision in McElgunn v Vermilion Energy Inc, 2026 ABKB 188 (“Vermilion”) serves as a helpful reminder that it’s not so simple to avoid paying incentive compensation to terminated employees. This is one of the most commonly litigated issues in wrongful dismissal cases, underscoring the need for employers to be very intentional when crafting their plan terms.
Basic Rules
The Vermilion decision helpfully summarized the following basic rules regarding an employee’s entitlement to claim incentive amounts following a without-cause termination.
Employers have a common law right to terminate employment contracts without cause, subject to an implied term to provide reasonable notice of the termination. Failure to provide reasonable notice (or even providing payment in lieu of notice) constitutes a breach of the implied term where the remedy is damages for what the employee would have earned had notice been provided—including bonus and incentive amounts.
Employers have the ability to contract out of having to pay bonuses and incentive awards during a period of reasonable notice but must do so carefully, as courts closely scrutinize contractual terms designed to deprive employees of their common law rights to compensation.
In determining whether an employee is owed wrongful dismissal damages for bonuses or incentive awards, courts ask two questions (commonly called the “Matthews test” after the Supreme Court of Canada’s decision in Matthews v Ocean Nutrition Limited, 2020 SCC 26):
- Would the employee have received entitlement had their employment continued for the reasonable notice period?
- If yes, does the relevant agreement or plan unambiguously alter or remove that entitlement?
There are many ways that a contract can fail at step two. One possibility is where the agreement purporting to limit the employee’s entitlement lacks contractual force, which can happen when the employee has not been provided adequate consideration (i.e. something in exchange) for their agreement. A second possibility is where the limiting language is ambiguous or does not apply to precisely the circumstances which have arisen. The Vermilion decision dealt with both of these issues.
Case Summary: McElgunn v Vermilion Energy Inc
The plaintiff in the case was a senior geological advisor with nine years of service terminated without cause and without reasonable notice. The plaintiff had received a share grant under the company’s incentive program (the “VIP”) which was scheduled to vest during the reasonable notice period. The key issue before the Court was whether the employee was entitled to receive the shares, or damages in lieu, despite her termination.
The VIP stated if an employee was terminated without cause, then 90 days after the Date of Termination, all outstanding award agreements and unvested share awards would be terminated and all rights to receive payment from the employer forfeited. The “Date of Termination” was defined as “the actual date the Service Provider ceases to provide services to the Corporation, regardless of the reason for the cessation of services”.
Whether this language had contractual force was put in issue because, at the time the Plaintiff signed the VIP in 2012, it had not contained the same language purporting to limit the Plaintiff’s post-termination entitlements. That language had been added in a 2020 version of the VIP, which the Plaintiff had not signed.
The Court accepted that a provision in the 2012 VIP giving the board the power to amend the plan, including its early termination provisions, meant the changes to the termination provisions in 2020 were binding on the Plaintiff without the need for fresh consideration (i.e. something new in exchange for her acceptance). While this conclusion has legal significance for employers (as noted below), the point was somewhat moot in the case since the Plaintiff had also signed a Share Award Agreement explicitly making the grant subject to the 2020 VIP.
Having established the language was contractually enforceable, the Court then considered whether it was sufficiently clear and unambiguous to deprive the Plaintiff of her entitlement to a bonus during the reasonable notice period. The Court concluded that it was not.
In its reasoning, the Court cited a common principle in wrongful dismissal cases that the employment contract effectively “remains alive” for the duration of the reasonable notice period. This can create an ambiguity when an incentive plan references the “termination date” as the cut-off point for an employee’s entitlements. In such cases, the “termination date” can often be interpreted to mean either the date the employee is notified of their termination or the end of the reasonable notice period.
The Court found this ambiguity arose with respect to the Plaintiff’s VIP entitlements. It concluded that the language purporting to deprive the Plaintiff of her share grant effective 90 days after the “Date of Termination” could have meant either 90 days after she was given notice or 90 days after the end of the reasonable notice period.
Although the VIP defined the “Date of Termination” with reference to the “actual date [the Plaintiff] ceases to provide services”, the Court found this was not sufficient. The Court suggested the Defendant could have instead defined the termination date with reference to the date on which the Plaintiff was actually given notice, exclusive of any subsequent reasonable notice period.
In the result, the language in the VIP was not sufficient to remove the Plaintiff’s entitlements with respect to the share award scheduled to vest during the reasonable notice period, and the Defendant was ordered to pay damages to compensate her for the lost award.
Recommendations for Employers
In order to prevent a similar result, employers must be extremely careful in crafting their incentive plan terms. In particular, language intended to remove employee entitlements to incentive payments upon termination should define termination so as to eliminate any ambiguity that could result in “termination” being construed as meaning the end of the reasonable notice period.
Note that this type of ambiguity is just one of many ways clauses purporting to limit employee entitlements can fail. Cases like Vermilion demonstrate the importance of periodically reviewing incentive plan terms and practices to ensure ongoing compliance with evolving common law guidance. Employers using old or dated plan language are highly encouraged to seek legal advice as to the enforceability of their language.
Employers must also pay careful attention to ensuring that any amendments to incentive plan terms are supported by fresh and valid consideration. One possibility, as shown in Vermilion, is to try and preempt the issue altogether by incorporating language reserving a right for the employer to make future amendments affecting employee entitlements upon termination.
While this may be possible, it should not necessarily be considered sufficient. The more robust approach is to do as the employer in Vermilion did by additionally making every incentive grant conditional on employees’ express agreement to be bound by legally enforceable terms limiting their entitlements post termination. Making every grant subject to its own award agreement eliminates any argument about a lack of consideration.
“Bonus” Point
One final point to note is that, depending on how an employer’s share plan is structured, an employee’s entitlement to shares or share payments under the plan will not necessarily be governed by the same employment principles set out above. This can be the case where share entitlements are characterized as a return on investment of the employee’s own funds rather than as an element of employment compensation. In such cases, a term like “termination date” is given its ordinary meaning (i.e. the last day of an employee’s employment) instead of its employment meaning (i.e. the last day of the reasonable notice period). For example, see Mikelsteins v Morrison Hershfield Limited, 2021 ONCA 155, leave refused 2022 CanLII 1934 (SCC).