Reminder to Employers: Strict Drafting Requirements for Incentive Plans

An Alberta decision from earlier this year provides a useful reminder to employers: if an incentive plan is meant to cut off an employee’s right to damages for awards that would vest during the reasonable notice period, the wording must be drafted clearly.

Case and Background

In McElgunn v. Vermilion Energy Inc., 2026 ABKB 188, [McElgunn] the Alberta Court of King’s Bench held that a wrongfully dismissed employee was entitled to damages for a share award that would have vested during her common law reasonable notice period. The applicable incentive plan contained detailed termination language. It still fell short.

The decision applied the framework set by the Supreme Court of Canada in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 [Matthews] regarding entitlement to bonuses that vest during a reasonable notice period. Matthews directs courts to ask two questions:

1. But for the termination, would the employee have received the bonus, benefit, or equity award during the reasonable notice period?
2. If the answer is yes, does the employment contract or incentive plan unambiguously take away or limit that common law right?

In McElgunn, the former employee had worked for the employer, Vermilion, for approximately nine years in a senior role before her employment was terminated. The parties agreed to arbitrate Ms. McElgunn’s resulting claim for reasonable notice and damages. The arbitrator found that she was entitled to 10 months’ reasonable notice. During that period, a share grant earned by Ms. McElgunn was scheduled to vest. Vermilion maintained the position that the share grant did not vest and was not payable under the terms of the applicable incentive plan.

The key question was whether Ms. McElgunn was entitled to damages for loss of that award. The arbitrator concluded that she was not. In his view, the termination provisions in the incentive plan removed her entitlement.

Appeal Decision Analysis

On appeal, the Court accepted the arbitrator’s factual findings but held that he had misapplied the second stage of the Matthews test. The appeal was allowed, and the award was varied to require Vermilion to pay damages for the lost share award.

With respect to the key contractual language, the Court applied the exacting standard set out in Matthews. Because the incentive plan was not negotiated, the exclusionary wording had to be construed strictly. It had to address the precise situation before the Court and remove the employee’s entitlement in clear and unambiguous terms. The Court found that the incentive plan did not meet that standard, noting two areas of ambiguity in the text.

First, the term “Date of Termination” in the incentive plan was defined as the actual date Ms. McElgunn ceased providing services, regardless of the reason. Vermilion argued that this meant Ms. McElgunn’s last day of actively working. The Court found that the definition was capable of more than one interpretation in the circumstances.

In a wrongful dismissal damages analysis, the contract is treated as continuing through the reasonable notice period. Against that legal backdrop, the phrase “ceased to provide services” did not identify with sufficient clarity whether the relevant date was Ms. McElgunn’s final working day or, alternatively, the end of the reasonable notice period. That ambiguity was enough to defeat the exclusion.

Second, the forfeiture provision in the incentive plan provided that unvested awards would terminate after a 90-day period and that Ms. McElgunn would not receive payment or compensation in lieu. The final sentence in the forfeiture provision began with the words “For clarity” and contemplated “the 90 day period following the Date of Termination and any notice period thereafter”. Instead of adding clarification, the Court found that the wording created at least two competing interpretations and could be read as supporting two alternative timelines.

The result is a drafting lesson with a built-in turn of phrase: merely saying “for clarity” will not rescue a sentence that supports more than one reasonable reading. The Court noted that if Vermilion intended all vesting rights to end 90 days after notice of termination, it could have said so directly or more clearly.

Takeaways for Employers

McElgunn affirms that incentive plans must precisely address intended exclusions. Employers and advisors reviewing bonus and equity plans should test the language against a wrongful dismissal scenario. Plans must make clear which date controls exclusions and whether any post-termination period runs concurrently with, or separately from, another notice period. Furthermore, defined terms should not depend on phrases such as “active employment” or “actually providing services” without explaining how those concepts apply to a claim for damages.

The jurisprudence continues to demonstrate that broad forfeiture wording, active employment requirements and even language referring to notice or pay in lieu may not be enough. When common law damages are at stake, clarity is essential.

For further reading on this topic, you can refer to our previous blog post about another recent decision concerning the interpretation of employment incentive plans here.

For up-to-date advising or assistance with employment matters, please contact one of McDougall Gauley’s Labour and Employment lawyers.