Canada: Non-Discretionary Bonuses

Last Updated: January 9 2019
Article by Chris Justice

It is quite common for employers to omit (intentionally or otherwise) payment of any bonuses a dismissed employee would have earned had they been given working notice or remained employed.  This has been in the spite of case law being less favourable to employers in regard to their liability in paying bonuses following a termination.

More recent case law, however, has shown that, provided employers draft clear and unequivocal bonus plan provisions in their employment agreements, the courts in Ontario will look to enforce these provisions.

Generally speaking, non-discretionary bonuses that are key components of an employee's compensation are recoverable in a lawsuit. The reason for this is because employees are entitled to be "made whole" in terms of their entire compensation package following a wrongful dismissal, subject to an enforceable contract stating otherwise. In a lawsuit, where bonuses are involved, the employee often seeks damages for any bonus amounts owed up to the date of termination and any bonus amounts they would have received over the notice period but for their termination.

In an effort to combat paying these damage amounts, more and more, employers have been inserting language into their bonus plans stating that the employee must be actively employed on the date the bonus is paid out in order to receive it.

The 2016 Ontario Court of Appeal decisions of Paquette v. TeraGo Networks Inc. 2016 ONCA 618 ("Paquette") and Lin v. Ontario Teachers' Pension Plan 2016 ONCA 619 ("Lin"), illustrated that drafting an enforceable bonus provision is easier said than done.

In Paquette, Mr. Paquette's bonus plan stated as follows:

The employer's bonus program or plan provided that an employee "actively employed by TeraGo on the date of the bonus payout" was eligible for a bonus based on his or her salary. An employee received a bonus if: (a) the employee met his or her personal objectives, determined by the manager and approved by a vice-president; and (b) TeraGo's performance met the corporate objectives set by its Compensation Committee

The Court held that a term in a bonus plan requiring active employment when the bonus is paid, without more, is insufficient to disentitle the dismissed employee to compensation in lieu of their bonus during the notice period.

In Lin, the relevant language of the bonus plans is as follows:

AIP: In the case where a Participant resigns or the Participant's employment is terminated by [Teachers'] prior to the payout of a bonus (normally the first pay period in April), no bonus shall be earned or payable to the Participant.

LTIP: In the case the Participant resigns or the Participant's employment is terminated by [Teachers'], the Participant's Dollar Grants not yet vested at the time of termination shall be forfeited forthwith without any right to compensation.

The Court of Appeal found the language in the AIP and LTIP did not "unambiguously alter or remove" Mr. Lin's common law right to damages for the bonuses where reasonable notice was not provided. A clause that no bonus is payable where employment is terminated by the employer prior to the payout of the bonus is, in effect, the same as the requirement of "active employment" at the date of bonus payout required in Paquette. The Court of Appeal held that "termination" must be taken to mean a lawful termination (i.e., following reasonable notice) absent clear language to the contrary.

While these cases did little favours to employers looking to limit their liability when refusing to pay bonus amounts to a dismissed employee, there has been some more recent case law which should give employers hope and a little more clarity on what constitutes an enforceable bonus clause.

Less than a year following Paquette, the Court of Appeal in Kielb v. National Money Mart Company, 2017 ONCA 356 ("Kielb") was faced with a similar situation, with a bonus provision that provided that the bonus did not accrue and was only earned and payable on the pay-out date.  It went on to further state:

For example, if your employment is terminated, with or without cause, on the day before the day on which a bonus would otherwise have been paid, you hereby waive any claim to that bonus or any portion thereof.  In the event that your employment is terminated without cause, and a bonus would ordinarily be paid after the expiration of the statutory notice period, you hereby waive any claim to that bonus or any portion thereof.

The Court of Appeal agreed with the trial judge who found the bonus clause to be unambiguous.

On November 8, 2017, the Court of Appeal issued a further decision in Bois v. MD Physician Services Inc. 2017 ONCA 857 ("Bois"), dealing with bonuses, this time in the context of a resignation. In that case, when Mr. Bois started working for the employer, his bonus plan stated the following:

In the event a Participant's Continuous Active Employment terminates, either voluntarily or involuntarily and whether for cause or not for cause, the Participant will immediately forfeit any entitlement to any payments under this plan whether attributable to prior years or to the current year.

The language of the plan was changed in 2010 to state the following:

All incentive and VIP payments are made in February and/or March following the calendar year to which they apply. In any given year, you must be a permanent employee of the CMAH Group of Companies on December 31 of the year for which the incentive is paid and continue to be so employed on the payment date(s) to receive a payment. Any employee who is no longer employed with the organization or has given notice of termination prior to the payout date will not be eligible to receive a payment.

Bonuses were paid over a period of three years in three separate instalments following the year the bonus was awarded.  Furthermore, as per the plan, any employee who leaves, or gives notice to leave the company on or before the bonus payout date was disentitled to receiving said bonus.

Mr. Bois resigned before the employer paid the final instalment of the 2009 bonus and the last 2 instalments of the 2010 bonus. The employer did not pay Mr. Bois these amounts, subsequently leading to Mr. Bois' lawsuit.

Mr. Bois relied in part on s.11(5) of Ontario's Employment Standards Act, 2000 requiring that an employer pays out wages to which an employee is entitled, no later than the later of the employee's normal pay date and seven days after employment ends. He also relied on section 13(1), which states that an employer shall not withhold wages payable to an employee.

Mr. Bois' case was ultimately dismissed by the Court of Appeal for the following reasons:

  1. The bonus policy clearly required that employees be actively employed on the date of a bonus installment pay-out in order to receive the installment;
  2. The employee had notice of the active employment requirement, and he knew or ought to have known when he resigned that he would be forfeiting entitlement to the bonus; and
  3. The employee's entitlement to continued payment of the bonus was extinguished by reason of his resignation.

While these recent cases should provide encouragement to employers, it needs to be noted that the notice period in Kielb ended before the bonus pay-out date and that the employee did not challenge the enforceability of the termination clause in his contract. Additionally, Bois involved an employee who resigned. Whether and to what extent these distinguishing features will be used by plaintiff counsel in future cases remains uncertain, but employers should nonetheless be encouraged by cases like Kielb and Bois.

However, what is clear is that employers should seek legal advice before drafting and implementing bonus policies to ensure their liability is reduced as much as possible. Similarly, employees should seek legal advice to know how and to what extent any bonus plans may affect their entitlements during and after their employment ends. If you have questions, do not hesitate to contact MacDonald & Associates right away!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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