Executive Termination and Severance in Alberta

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Severance entitlements for CEOs, directors or senior managers rarely boil down to base salary. Executive compensation often include bonuses, commissions, restricted share units (RSUs), performance share units (PSUs), stock options, allowances, benefits and other incentives governed by several overlapping agreements.

An executive’s severance entitlement may include compensation that would have been earned or vested during the reasonable-notice period. The result often depends on the precise wording of the employment agreement, incentive plan and termination provisions. A clause stating that an executive must be “actively employed” on a vesting date may not, by itself, remove that entitlement.

Executive departures can also create competing obligations. Directors and officers must act honestly and in good faith with a view to the corporation’s best interests. Senior employees may have additional duties of loyalty, confidentiality and good faith arising from the nature of their positions. These duties can affect how an executive prepares to leave, communicates with employees or clients, preserves corporate information or approaches acompeting business.

Employment agreements may also contain non-competition and non-solicitation clauses. Restrictive covenants are closely scrutinized by the courts and must be clear and reasonably limited. However, an executive should not assume that a restrictive covenant is unenforceable, or begin competing, recruiting employees or contacting clients, without first obtaining advice.

The structure of a severance package can be as important as its stated value. Salary-continuance agreements frequently contain provisions allowing the employer to reduce or discontinue payments if the executive obtains new employment. Payments may also be made conditional on continuing compliance with confidentiality, non-disparagement, cooperation or restrictive-covenant obligations. These provisions should be reviewed carefully before a release is signed.

Payment timing can have significant tax consequences. Depending on the circumstances, it may be possible to defer part of a severance payment into the following calendar year, divide payments between years or arrange a direct transfer of qualifying amounts to an RRSP. Tax treatment depends on how each part of the settlement is characterized, and employment and tax advice should be coordinated before the payment terms are finalized.

Executives should also consider whether the employer will remain able to satisfy its obligations. A lengthy payment schedule may offer little protection if the company later becomes insolvent. This risk can be greater where assets, revenue or business operations are being transferred to related companies while liabilities remain with the original employer.

Bankruptcy can substantially change an executive’s position. Termination and severance claims may be treated as unsecured claims, while officers and directors can be excluded from certain wage priorities. A successful lawsuit has limited value if there are no assets available to satisfy the judgment. In appropriate cases, it may be necessary to examine related corporations, intercompany transfers, the identity of the true employer and whether relief is available against parties other than the insolvent company.

Incorporation does not automatically protect every individual from liability. Particularly with closely-held groups of companies, directors and officers can face personal exposure in limited circumstances, including certain statutory wage claims, personal guarantees, their own wrongful conduct or participation in oppressive conduct. The availability of a claim depends on the specific facts and should not be assumed merely because a person held a senior title.

Executive terminations require both a legal and financial assessment. Before signing a release, accepting continuing payments or taking steps toward a competing business, it is worth having the complete arrangement reviewed, including the employment agreement, compensation plans, corporate structure and the employer’s apparent ability to pay.

With senior management, conventional formulas based on age, tenure, education and position go out the window. As do general rules of thumb, such as one month of notice for each year of service. Courts frequently award lengthy notice periods to executives with relatively short tenures because comparable positions tend to be scarcer, recruitment processes lengthier or employers more exacting. 

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