The Ontario Court of Appeal recently upheld a lower court's dismissal of an employee's claim for payment of a bonus after resignation because the employer's non-discretionary bonus policy included an "active employment" clause. The decision in Bois v. MD Physician Services Inc., 2017 ONCA 857 (affirming 2016 ONSC 8133), confirms that an agreement made by the parties will govern when bonuses are declared, earned, accrued, and payable.
An "active employment" clause in a bonus policy generally requires an eligible employee to be actively employed at the time a bonus is paid in order to receive that bonus. These clauses are often the subject of litigation in wrongful dismissal suits because employers rely on them to refuse payment of a non-discretionary bonus that would otherwise have been earned by an employee.
Earlier this year, the Ontario Court of Appeal released its decision in Kielb v. National Money Mart Company, 2017 ONCA 356, which bolstered a growing line of cases backing the validity and enforceability of such "active employment" clauses in non-discretionary bonus policies. On November 8, 2017, the Court of Appeal issued its decision in Bois v. MD Physician Services Inc., which dealt with this subject in the context of a resignation.
Together, these decisions demonstrate how a carefully crafted active employment clause can limit an employer's obligation to pay non-discretionary bonuses when an employment relationship comes to an end.
When Bois, the appellant employee, commenced employment, the relevant bonus policy language provided:
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.
This language was amended in 2010 to provide:
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.
The bonuses were considered wages within the meaning of the Employment Standards Act, 2000 (ESA) because they compensated employees for their performance. Once calculated, the bonuses were payable in three equal installments: the first in the calendar year in which the bonus was calculated and the remaining two-thirds in the following two years. For example, a bonus earned in 2007 was paid in three equal installments in 2008, 2009, and 2010.
The employee resigned from employment in October 2011, before the pay-out dates for the final installment of his 2009 bonus and second and third installments of his 2010 bonus. The employer did not pay these final installments because the employee did not satisfy the bonus policy's active employment requirement.
The employee brought a summary judgment motion seeking damages representing the three remaining bonus installments. The motion judge dismissed his motion for three reasons:
- 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;
- 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
- The employee's entitlement to continued payment of the bonus was extinguished by reason of his resignation.
The employee challenged the third reason on appeal, contending that the motion judge had erred in her interpretation of sections 11(5) and 13 of the ESA, which provide:
11(5) If employment ends - if an employee's employment ends, the employer shall pay any wages to which the employee is entitled to the employee not later than the later of,
- seven days after the employment ends; and
- the day that would have been the employee's next pay day.
13(1) Deductions, etc. - An employer shall not withhold wages payable to an employee, make a deduction from an employee's wages or cause the employee to return his or her wages to the employer unless authorized to do so under this section.
The employee argued that he had already earned the 2009 and 2010 bonuses; therefore, pursuant to section 11(5) of the ESA, he was entitled to payment of all future installments when his employment ended. In essence, he claimed that section 11(5) accelerated the employer's obligation to pay out future bonus installments, and that this trumped the bonus policy's requirement of active employment at the time of pay-out. In the alternative, the employee argued that failure to pay the future installments constituted the withholding of wages, contrary to section 13(1) of the ESA.
In a short decision, the Court of Appeal dismissed the appeal, having found no error in the motion judge's approach or conclusion. The motion judge had found that section 11(5) of the ESA imposes a requirement to pay "wages to which the employee is entitled" at the time employment ends, in contrast to an employer's obligation to pay "wages earned" in a recurring pay period under section 11(1) of the ESA:
11(1) Payment of wages - An employer shall establish a recurring pay period and a recurring pay day and shall pay all wages earned during each pay period, other than accruing vacation pay, no later than the pay day for that period. [emphasis added]
The motion judge found the distinction between "wages to which the employee is entitled" in section 11(5) and "wages earned during each pay period" in section 11(1) to be determinative. In light of this distinction, an employee's entitlement to wages when his employment ends may be greater than the recurring wages that he earns in his final pay period. Put another way, an employee is "entitled" to both his regular recurring wages and any other non-recurring wages he has earned to and including the date on which the employment relationship ends.
However, the ESA does not define how that broader "entitlement" to wages should be determined, other than to require that any such entitlement be calculated to the end of the applicable notice period. This permits employers to set parameters and impose limitations on how entitlement to non-recurring wages may be ascertained at termination, such as by way of the "active employment" requirement in the bonus policy under challenge.
Having properly considered all wages to which the employee was entitled pursuant to section 11(5) of the ESA and the bonus policy, the employer had "rightfully and correctly determined that by reason of his resignation, the [employee's] entitlement to the bonus was extinguished." The Court of Appeal affirmed this conclusion, adding that "it was open to the parties to agree how and when any bonus was declared, earned, accrued and would be payable" pursuant to Kielb.
As for section 13(1) of the ESA, the Court of Appeal affirmed the motion judge's finding that the future bonus pay-outs did not constitute "wages payable to an employee" at the time of resignation. Accordingly, no withholding of wages could be made out.
Kielb and Bois affirm that employers may limit an employee's bonus entitlement at termination or resignation by taking the following steps:
- Incorporate a clearly worded "active employment" requirement in the bonus policy;
- Provide employees with advance notice of the "active employment" requirement such that they know or ought to know how that requirement will affect their entitlement when the employment relationship ends, for whatever reason; and
- Determine the employee's entitlement to all wages, including bonus, at the time the employment relationship ends pursuant to the terms of the bonus policy and section 11(5) of the ESA, being careful to calculate entitlement to the end of the applicable notice period where the employee is 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.