Canada: Limiting Bonus Payments On Termination Continues To Be An Uphill Battle

Bonuses and other forms of incentive compensation often form a significant part of employees' compensation, and employees' entitlement to such compensation are highly disputed in the context of wrongful dismissal claims. Recently, two such claims were decided by the Ontario Court of Appeal. Both decisions held that an employee's right to compensation for bonuses that would have been paid during the employee's reasonable notice period upon termination without cause may not be avoided by the inclusion of contractual language requiring that the employee be "actively employed" on the date a bonus is paid to receive the bonus. 


In the first case, Paquette v TeraGo Networks Inc., the employee, Trevor Paquette, was terminated without cause after approximately 14 years of service with the defendant, TeraGo Networks Inc. (TeraGo). Upon termination of his employment, TeraGo offered Paquette 30 weeks' base salary in lieu of notice. Paquette refused TeraGo's offer and commenced an action for wrongful dismissal, claiming the value of his salary, bonuses and benefits that he would have received for the duration of his reasonable notice period.

At trial, Paquette was awarded damages in lieu of 17 months' notice, taking into account his salary and benefits only. The trial court excluded the bonuses which he would have earned during his notice period on the basis of its interpretation of TeraGo's bonus program. The program required employees to be "actively employed by TeraGo on the date of the bonus payout" in order to receive a bonus payment. The trial court reasoned that, while Paquette was a notional employee during the reasonable notice period, he was not an "active employee" and therefore he was ineligible for the bonuses that would have been paid during the notice period.

Paquette appealed the trial court's decision and the Court of Appeal found in favour of Paquette, holding that the language contained in the bonus program did not preclude him from claiming compensation (i.e., damages) for the lost opportunity to "work out the notice period" and thus receive his bonuses. The Court clarified that Paquette's claim was "not for the bonuses themselves, but rather for common law contract damages as compensation for the [bonuses] he would have received had TeraGo not breached his employment contract by failing to give reasonable notice of termination".

In the second case, Lin v Ontario Teachers' Pension Plan Board, the employee, David Tay Der Lin, was terminated for cause after 8 years of service. The trial judge found that the employer did not have just cause to terminate Lin's employment and awarded him 15 months' compensation in lieu of notice. The compensation awarded to Lin included his salary, benefits, pension and his bonuses under the employer's short-term and long-term incentive plans, notwithstanding language in both plans stated that no bonus would be paid in the event of termination of employment prior to receipt of the bonus payment.

The employer appealed, but the Court of Appeal affirmed the trial court's decision, finding that Lin was entitled to the bonus compensation that he would have earned during his reasonable notice period. The Court held that the bonus plan did not "unambiguously alter or remove [Lin's] common law right to damages, which include compensation for the bonuses he would have received while employed and during the notice period". Although the Court acknowledged that parties may bargain (i.e., contract) for something other than what the common law provides, it held that the plan language in this case was insufficient to deprive Lin of the right to compensation for the bonus he would have earned during his reasonable notice period.

The Court of Appeal in Lin also considered a 2010 amendment to the employee incentive plans, which provided that no bonus would be paid to an employee past the date that he or she was "notified that his or her employment or services [were] terminated (whether such termination [was] lawful or unlawful)". The Court ultimately found that the amendment did not apply to Lin because he did not explicitly consent to the amendments after being asked to do so.

Our Views

Taken together, Paquette and Lin demonstrate the Ontario courts' resistance to limiting employees' entitlements upon termination without cause to exclude incentive compensation, especially where that incentive compensation forms an integral part of the employee's total compensation and where the employee is deprived of the opportunity to earn such compensation during the reasonable notice period as a result of the employer's decision to terminate the employee on a without cause basis. Although both decisions suggest that an employee may agree to waive his or her right to damages in lieu of a bonus payment during the employee's reasonable notice period, they do not provide guidance as to what would be required to effectively do so.  When entering into employment contracts with new employees and when rolling out incentive plans, employers should ensure that, going forward, explicit language is included in the contract and/or the plan documents that clearly states what damages the employee is entitled to if terminated without cause

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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