By Ozlem Yucel
This question is often a source of disagreement between employers and employees. Consequently, many employers have attempted to preempt this issue by drafting bonus plans that specifically restrict payment upon termination. The enforceability of these plans has been the topic of several Court of Appeal cases recently. Interestingly, the Court has come to different conclusions in different cases.
Background
As a general principle, employees are entitled to advanced notice of their terminations, or pay in lieu thereof. If payment in lieu of notice is provided, it must include all of the compensation and benefits the employee would have earned, had they continued to work during the notice period. This typically includes bonus.
To determine whether a bonus is included in the calculation of pay in lieu of notice, courts will generally apply the following test:
1. Did the bonus form an integral part of the employee’s compensation?
2. If so, was there a contract or bonus plan containing language that unambiguously alters, or removes, the employee’s entitlement?
Under the first step of the test (to determine whether bonus is an integral part of the employee’s compensation), courts will consider the following, amongst other, things:
i. Whether bonus was consistently paid to the employee, year after year;
ii. The amount of bonus and whether it constituted a sizeable portion of the employee’s overall compensation; and
iii. Whether the employee reasonably anticipated receiving the bonus.
If the bonus is determined to be an integral part of the employee’s compensation, then he or she will be entitled to that bonus. However, as outlined above, this entitlement can be limited, or removed entirely, by a bonus plan.
So, what kind of language will serve to alter, or remove, the employee’s entitlement?
Three Ontario Court of Appeal Decisions – Two Different Outcomes
Last year, the Ontario Court of Appeal rendered two decisions, standing for the principle that bonus plan language requiring an employee to be “actively employed” on the date of payout will not be enough to displace their bonus entitlement.
In Paquette v. TeraGo Networks Inc., 2016 ONCA 618 (“Paquette”), the employer relied on a bonus plan to withhold the employee’s bonus for the fiscal year leading up to his dismissal, as well as his pro-rated bonus over the notice period. The bonus plan provided that an employee “actively employed on the date of the bonus payout” was eligible for a bonus. In this case, the employee was terminated two months before his bonus was to be paid. As such, the employer argued, the employee was not eligible for his bonus because he was not employed on the payout date, as required under the plan.
The Court of Appeal rejected the employer’s position. It considered bonus plan language requiring “active employment”, without anything more, to be insufficient to disentitle an employee from his bonus. The reasoning of the Court was as follows: had the employer terminated the employee lawfully (by providing him with advanced notice of his termination), he would have been “actively employed” on the date the bonus would have been paid out and, thus, eligible for a bonus.
This reasoning was followed by the Court of Appeal in Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619 (“Lin”). In that case, an employee, who was terminated one month before his payout date, was awarded his bonus, despite plan language that stated no bonus would be payable if termination preceded the payout date.
The principle coming out of Paquette and Lin is that a bonus plan requiring an employee to be actively employed on the date of payout, without anything more, does not necessarily disentitle the employee from their bonus. If the payout date falls within the employee’s notice period, the employee should still receive their bonus.
This year, the Court of Appeal came to a different conclusion however.
In Kielb v. National Money Mart Company, 2017 ONCA 356 (“Kielb”), an employee was terminated approximately 5 months prior to the date his bonus was to be paid out. The employer relied on the company’s bonus plan to withhold from the employee the bonus he earned leading up to his termination, as well as over his notice period. The bonus plan stated:
“Any bonus which may be paid is entirely at the discretion of the Company, does not accrue, and is only earned and payable on the date that it is provided to you by the Company. For example, if your employment is terminated, with or without cause, on the day before the day on which a bonus would otherwise have been paid, you hereby waive any claim to that bonus or any portion thereof. In the event that your employment is terminated without cause, and a bonus would ordinarily be paid after the expiration of the statutory notice period, you hereby waive any claim to that bonus or any portion thereof. You also hereby waive any claim to constructive dismissal based on the fact that a bonus is not paid, is less than was previously paid, or is less than is paid to another employee” (emphasis added).
The Court of Appeal held that this language disentitled the employee from his bonus. Even if he were provided the maximum amount of notice (pursuant to his employment contract), he would not have been employed on the bonus payout date. Thus, the employee was not eligible for a bonus under the plan.
In coming to this conclusion, the Court emphasized that, although the outcome may seem harsh for the employee (he was denied a bonus amounting to 60% of his salary), he was fully aware of the restrictive language in the bonus plan. He had negotiated the contract at length and, by signing off on it, he had agreed to its less favourable clauses. The Court could not allow the employee to get out of a contract that he had knowingly entered into.
Key Take-Aways
The key take-away coming out of these cases is that a bonus plan requiring “active employment”, and nothing more, will not be enough to disentitle an employee from a bonus where the payout date falls within the employee’s notice period. While the Court of Appeal came to a different conclusion in Kielb, the facts in that case are distinguishable from Paquette and Lin. For one, in Kielb, the bonus payout date did not fall within the employee’s notice period. Thus, even if the employee were considered to be “actively employed” throughout his contractual notice period, he would not have been on the payout date and, thus, ineligible for a bonus.
Kielb also highlights for employees the importance of understanding all the terms of a bonus plan before signing off on it. As the Court of Appeal noted in that case, any ambiguity in plan language can be resolved against an employee if he or she was aware of its terms – even if the outcome is particularly harsh. Thus, employees are encouraged to bargain for better terms in their contracts before signing off on them. Employees are also encouraged to explore bonus claims even if their bonus plans appear to preclude them from payment. As Paquette and Lin demonstrate, bonus plan language will not always disentitle employees from their bonuses upon termination.
Employers, on the other hand, are reminded by Paquette and Lin that, even if they have a bonus plan in place, those plans may not be enforced at all times. The plans must be carefully drafted so that they contain clear and unambiguous language to restrict the employer’s liabilities upon termination.
An employment lawyer can greatly assist both employers and employees in this regard. If you are looking for expert advice on your bonus plan or bonus entitlements, consult with a lawyer at Turnpenney Milne today.