Canada: Avoiding Bonus Payments To Terminated Employees Just Got Tougher

On August 9, 2016, the Ontario Court of Appeal released two decisions addressing employee entitlement to damages in lieu of a bonus on termination.

Generally speaking, the Court confirmed the principle that if a bonus forms an integral part of an employee's total compensation package then, in a wrongful dismissal action, he or she is entitled to damages in lieu of the bonus unless there is enforceable bonus plan language that limits the employee's entitlements. Where such language exists, it will be strictly construed.

The two decisions are summarized below:

Paquette v. TeraGo Networks Inc.

In Paquette, a 49-year-old employee with 14 years of service was terminated without cause. At the time of his termination, he held the position of Director, Billing and Operations Support Services. He sued for wrongful dismissal and brought a summary judgment motion to determine his entitlements. At the summary judgment motion, he was awarded 17 months of pay in lieu of notice, calculated as his base salary and benefits. He sought compensation for his lost bonus over the 17 month notice period, but this relief was denied by the motion judge, who held as follows:

I conclude that Mr. Paquette is not entitled to any bonus payments. Although the Bonus Program at TeraGo was an integral part of Mr. Paquette's employment, there is no ambiguity in the contract terms of the Bonus Program. Mr. Paquette may be notionally an employee during the reasonable notice period; however, he will not be an "active employee" and therefore, he does not qualify for a bonus.

The employee appealed. He was successful.

In arriving at its decision, the Court of Appeal relied on earlier bonus-related jurisprudence which, among other things, stood for the principle that if a bonus is an integral part of an employee's total compensation, it would be inappropriate and unfair to the employee to be deprived of the bonus by reason of the unilateral action of the employer.

With respect to language purporting to limit bonus entitlement to only "active employees", the Court of Appeal held that the motion judge had focused too narrowly on whether such language was ambiguous. The claim was not for the bonus, but rather for damages in lieu of a bonus. Accordingly, the Court of Appeal held that the motion judge ought to have pursued a two-step analysis:

  1. What are the employee's common law entitlements, including whether, under the common law, he would be entitled to a bonus during his reasonable notice period; and
  2. If so, whether there is specific wording in the bonus plan that unambiguously alters or removes the employee's common law entitlements.

The Court distinguished its 2004 case, Kieran v. Ingram Micro, holding that (a) Kieran is a stock option case and that stock options, while similar to bonuses, may be subject to a different test; and (b) in any event, the Court in Kieran had applied the correct two part test, determining that the limiting language contained in the impugned stock option plan unambiguously altered the employee's common law rights.

On a separate note, in Paquette, the employee calculated his damages for 17 months of bonus by averaging the bonuses that he had received over the previous four years. The Court approved the averaging formula on the basis that the employer offered no evidence to suggest an alternative calculation.

Lin v. Ontario Teachers' Pension Plan

In 2010, the employer in Lin sought to enforce amendments made to the company's annual bonus plan ("AIP") and long-term incentive plan ("LTIP"). By introducing the new language, the employer sought to bolster its right to deny an employee AIP or LTIP pay upon termination.

When the new language was introduced, the employer asked affected employees to "sign off" on the proposed changes to signify their agreement. Understandably, the employees were not keen to "sign off". As a result, the employer backed away from its request, but took the position that the new language was nevertheless applicable.

Lin was an investment professional who had worked at the OTPP for almost eight years before he was terminated for cause. At trial, the Court held that his employer did not have cause to terminate him and awarded him a notice period of 15 months. His damages award included certain amounts that he would have received and earned under the AIP and LTIP.

The employer appealed, relying on the new language that it had introduced in 2010 to its AIP and LTIP plans, which purported to limit an employee's entitlements on termination. The employer argued that despite refusing to "sign off" on the changes, by continuing his employment, the employee had acquiesced to the amendments and was therefore bound by them.

The appeal was dismissed.

In arriving at its decision, the Court of Appeal agreed with the trial judge that by seeking a "sign-off" to the purported amendments, the employer acknowledged that it could not unilaterally impose a change that was so highly material to an employee's compensation package. By refusing to sign off, the employee made it clear that he rejected the amendments. Accordingly, there was no acquiescence. In any event, applying its reasoning in Paquette, the Court found that a provision that no bonus is payable when the termination occurs prior to the bonus payment date is insufficient to deprive a terminated employee of the bonus he or she would have earned during the period of reasonable notice, as a component of damages for wrongful dismissal.

Key Take-Aways

  1. When considering whether an employee is entitled to his or her bonus over a notice period, make sure that your bonus plan language is carefully considered to determine whether it adequately removes the employee's common law entitlement to a bonus payment on termination.
  2. When drafting your bonus plan language, a simple statement requiring "active employment" or that "no bonus is payable if termination occurs prior to payout of the bonus" is inadequate. The language has to limit entitlement clearly and unambiguously.
  3. Language limiting an employee's entitlement to bonuses should be brought to his or her attention prior to the commencement of his or her employment.
  4. When amending bonus plan language, seek legal advice to ensure the amended plan is enforceable.
  5. If litigating an employee's entitlement to a bonus, submit evidence on the appropriate calculation for the bonus or risk having the Court apply an averaging formula.

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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