Canada: "You're Fired!": Calculating Employment Damages For A Loss Of Incentive Based Compensation

Losing your job can be a traumatic experience. In addition to being difficult for employees, it can be difficult and costly for employers.

The purpose of pay "in lieu of notice" is to put the employee in the position they would have been in had they continued to work through to the end of the notice period. In most industries, and in most cases, calculating what an employee may be entitled to in damages after they have been let go is an exercise in determining the notice period and then simply multiplying their salary by the number of weeks or months. The exercise of figuring out what the notice period can be is complicated, but the math (often) is not.

For employers and employees in industries like the capital markets, or for senior executives or salespeople who receive a high portion of their compensation in the form of a bonus or other incentive-based compensation, the exercise is more complicated.

On the termination of employment on a without cause basis, the employer is obligated to pay to the employee those aspects of the remuneration package that would have been received during the notice period, unless the terms of employment clearly state otherwise.

The first step is to look at the contract of employment. Does it govern what a notice period will be, and does it specify how damages will be calculated? It may. But employment agreements are often challenged in court, and sometimes struck down.

When it comes to whether an employee is entitled on termination to incentive-based compensation, such as bonus plans, stock options (vested or unvested), restricted or deferred sales units (RSUs or DSUs), the devil is often in the details.

It is important to ask whether the employee agreed to any contractual terms that purport to restrict their entitlement to such compensation on termination. In many instances, employment agreements will make reference to and incorporate applicable policies and procedures that form part of the employment agreement, which will govern bonus or incentive-based compensation rights. In addition, often employees are required to agree to the terms of specific policies such as a bonus or option plans as a condition of receiving an award. It is typical for larger and more sophisticated organizations to have these sorts of terms more clearly agreed to by employees.

In Matthews v. Ocean Nutrition, the Supreme Court of Canada set out a two-part test to determine whether damages for pay in lieu of notice should include payment of a bonus and other benefits: 1) Would the employee have been entitled to the bonus or benefits as part of their compensation during the reasonable notice period? 2) If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right? To take away the right, the provisions of any agreement must be "clear and unambiguous".¹

If there is doubt as to whether the employee would have received discretionary bonuses during the reasonable notice period, the court will analyze whether the payment of bonuses is or has become an integral part of the pay package of employees. Bonuses can (in some cases) be held to be integral even where a bonus is described as discretionary.² A bonus will be an integral part of an employee's compensation where it is received each year, it is required to be paid to remain competitive with other employers, where bonuses were historically awarded and the employer had never exercised discretion against the employee, and the bonus constituted a significant component of the employee's overall compensation.³ The mere fact that a bonus is discretionary does not mean that the decision to not award it can be done in an arbitrary or unfair fashion or that the employer can decide that an employee should not get a bonus without following a fair, identifiable process.⁴

Employers and employees dealing with wrongful termination cases need to look carefully at the applicable contractual and other terms that govern entitlement to incentive-based compensation. The mere fact that a policy exists that purports to take away an employee's rights does not suffice if the language is not sufficiently clear and unambiguous. Litigating these issues in court can be costly and expensive, and employers who pay a lot of incentive-based compensation should carefully review their employment contracts, policies, and procedures.

Footnotes

1. Matthews v. Ocean Nutrition, 2020 SCC 26 at para 65.

2. Brock v. Matthews Group Ltd. (1988), 20 C.C.E.L. 110 (Ont. H.C.), at para. 44, aff'd (1991), 34 C.C.E.L. 50 (Ont. C.A.), at paras. 6–7; Matthews, supra at paras. 56–58.

3. Gillies v. Goldman SachsCanada Inc., 2000 BCSC 355 (CanLII) at para 62, aff'd 2001 BCCA 683 (CanLII). The factors were cited most recently in Shalagin v Mercer Celgar Limited Partnership, 2022 BCSC 112 (CanLII) at para 92.

4. Bain v UBS, 2016 ONSC 5362 at paras 85-90, aff'd ONCA

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.