Many employers have annual bonus plans which provide additional
compensation to employees upon the achievement of certain
objectives. In an attempt to avoid paying bonuses to terminated
employees, many bonus plans contain language stating that employees
must be “actively employed” upon the date of payout in
order to receive a bonus payment. A recent decision of
the Ontario Court of Appeal has confirmed that such language by
itself is not sufficient to deprive an employee, who is terminated
without cause, of compensation for a bonus.
In the decision of Paquette v. TeraGo Networks Inc.,
TeraGo’s program provided that an employee must be
“actively employed by TeraGo on the date of the bonus
payout.” Mr. Paquette worked for TeraGo for 14 years and held
the position of Director, Billing and Operation Support Services at
the time of his without cause termination. Mr. Paquette
participated in the bonus program and received bonuses in each of
the 4 years prior to his termination. No contractual termination
clause existed and Mr. Paquette sued for damages for the wrongful
termination of his employment. The Court determined that Mr.
Paquette should have been provided with 17 months’ notice of
the termination of his employment and therefore was entitled to
damages for 17 months of reasonable notice.
The basic principle behind the determination of damages for
reasonable notice of termination is that the employee is entitled
to everything he or she would have earned if the employee had
remained employed during the reasonable notice period. This
includes base salary and things like pension/RRSP contributions,
benefits, allowances and other perquisites. It can also include
bonus payments the employee would have received during the
reasonable notice period unless the contract prevents that
Because of the timing of Mr. Paquette’s termination, he
would have been entitled to receive two more bonus payments if he
had remained employed during the 17 month reasonable notice period.
TeraGo took the position that he was not entitled to receive the
bonus payments as part of the compensation for wrongful dismissal
because the plan required that he be “actively
employed” at the time of payout. As he had been terminated
prior to the payout date, he was not “actively
employed”. The Court found that while the terms of a bonus
plan can limit an employee’s entitlement to a bonus payment
following a without cause termination, the requirement of
“active employment” is not sufficient to do so.
This case reiterates the importance of having clearly worded
bonus plans if you wish to limit the entitlement rights of
terminated employees. Even more effective is a properly worded
termination clause in the employment contract which excludes the
possibility of any bonus payment. We recommend that you seek legal
advice before implementing your bonus plan and would be pleased to
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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