Businesses often refuse to pay a bonus after an employee is fired, but, in some cases, the law in Ontario requires them to. Employers need carefully drafted bonus policies if they wish to avoid this obligation and employees need to know when to fight for their bonus after being fired, laid off or terminated.
Determining Whether a Bonus is Owed
The established legal test for determining an employee’s entitlement to damages on account of a lost bonus was set out by the Ontario Court of Appeal in Paquette v TeraGo Networks Inc. (“Paquette“).
In Paquette, the Court of Appeal judge noted that the motion judge’s analysis focused only on the wording of the incentive plan. The Court of Appeal judge stated that the motion judge should have focused on whether the wording of the plan was effective to limit his right to receive compensation for lost wages (including both salary and bonus) during the period of reasonable notice.
The legal test involves consideration of the following questions:
- Was the bonus an integral part of the employee’s compensation package, thereby triggering a common law entitlement to damages in lieu of bonus? and
- If so, is there any language in the bonus plan that would restrict the employee’s common law entitlement to damages in lieu of a bonus over the reasonable notice period?
The Court relied upon the basic principle of damages for wrongful dismissal that the employee should be in the position that he would have been, had he not been wrongfully terminated. Based on this, the Court found that the employee would have received the bonus and the requirement that he be actively employed could not limit his right to the bonus, because the reason he was not working was the employer’s wrongdoing in terminating the employee.
Language In the Contract and Bonus Plan Matters
Bonus plans can be effective in restricting an employee’s entitlement to bonuses in some cases but not in all cases. The plans must be carefully drafted so that they contain clear and unambiguous terms because courts are increasingly applying detailed scrutiny to their language and wording when determining entitlement.
The language must be very clear and state restrictions to entitlements in very definite terms – with no ambiguity. For example, the commonly used restrictive clause “employee must be actively employed” or engaged in “active employment” can be interpreted in different ways. Whether an employee is actively employed during the reasonable notice or statutory notice period is not always clear.
In another case, Kielb v National Money Mart Company (“Kielb”), an employee had signed an employment contract that contained a bonus plan limitation clause that stated the bonus would not accrue and was only payable on the payout date.
The employee argued that this limitation clause was unenforceable due to its ambiguous and contradictory nature and because it contravened the Employment Standards Act. The trial judge rejected these arguments. He found the limitation clause to be unambiguous. Read in its entirety, it was clear that if the bonus payout date had fallen within the notice period, then the employer would have been obliged to honour it. Upon appeal, the Court of Appeal agreed that the language disentitled the employee .
A Bonus Limitation Clause Needs to be Brought to the Employee’s Attention
In 2019, the Court of Appeal seems to have held that not only does a bonus limitation clause need to be clear, enforceable and unambiguous, it may also need to be brought to the workers attention.
In Dawe v The Equitable Life Insurance Company of Canada (“Dawe“), an employee was terminated without cause after 37 years of service. He sued for wrongful dismissal. The restrictive term provided that in order to participate in the plan, an employee “must be in the employ of the company at the time” the pay is processed. The employee alleged that he was never made aware of the change to his entitlements.
The motion judge found that the employee was entitled to his bonus for the notice period because it was an integral component of his compensation and the terms of the plans did not displace his common law entitlement. The employer appealed the motion judge’s decision to the Court of Appeal. Although the Court of Appeal ultimately agreed that the language in the contract and bonus plan effectively limited the employee’s bonus entitlement after termination, the Court of Appeal did not overturn the motion judge’s decision. The Court found that there was insufficient proof indicating that the employee fully appreciated the impact of the clause on his bonus entitlement after getting fired.
The Final Word on Bonuses after Termination
The Ontario Courts are concerned that employees know clearly what their rights are on termination. In this regard, their is an emphasis on the words used in the employers contracts and policies. Whether an employee is entitled to payment of their bonus after being terminated is difficult to know with any certainty for laymen and laywoman. This area of the law is currently in flux. The Supreme Court of Canada is currently opining on this issue and the law could change with their next decision.
While I ordinarily try to avoid shameless plugs, legal advice is critical in these circumstances and should be sought out.
Suggested recommendations for employers:
- Keep in mind that, if there is nothing that states otherwise, employees are entitled to bonus payments during the period of reasonable notice. As well, even if there is a contract or policy that says otherwise, it may not be enforceable, particularly where the result is harsh.
- The use of clear, unambiguous language is critical but is difficult to achieve in practice. Seek legal advice when drafting employment agreements, especially when including limiting language. The courts have clearly shown their willingness to rule against employers where there is any ambiguity.
- Structure compensation packages for new hires such that the bonuses are not an integral part of compensation, as well as including limiting language.
- Stipulate within the bonus plan that employees have no entitlement to bonuses during periods of reasonable notice. This limiting language must be clear and unambiguous.
- Create and practice a fair and clear process when assessing entitlements to a discretionary bonus for the period up to an employee’s dismissal.
- Conscientiously document performance issues or other issues that may influence bonus eligibility as per applicable bonus policies or employment contracts.
Suggested recommendations for employees:
Employees need to recognise the importance of understanding all terms of their contract before signing it. Suggested course of actions for employees include:
- Employees should not make assumptions as to whether or not they are entitled to bonuses, particularly where they have accrued.
- Employees need to take proactive steps to seek advice before signing any agreements.
- Bargain for better terms in contracts before signing them.
- Explore bonus claims even if the bonus plans appear to preclude them from payment
The bottom line is that there continues to be uncertainty regarding the rules around assessing an employee’s right to a bonus after dismissal. Courts strictly scrutinise wordings of bonus plans and employment contacts as part of their decision processes. In the end, employers need to ensure that their bonus policy includes clear, unambiguous language regarding the entitlements of employees upon dismissal.
Contact Justin W. Anisman
Justin W. Anisman is an Employment Lawyer at the Toronto law firm Brauti Thorning LLP. Justin advises both companies and individuals in all aspects of employment law including wrongful dismissal, human rights and discrimination.