Bonuses are a great way to attract top talent and keep them by rewarding and recognizing not only their contributions to the organization, but their decision to stay with the organization. However, sometimes bonuses are owed to employees even when they don’t stay.
Bonuses paid to employee can be discretionary – doled out by the employer when it sees fit rather than being tied to anything – and non-discretionary, which are linked to employee performance or business results. The latter are generally paid out on a regular basis and may be set out in employment agreements, and can be viewed as a regular and expected part of the employee’s compensation. Discretionary bonuses are also typically smaller than non-discretionary bonuses.
When a bonus is an expected part of the employee’s compensation, it’s something employers need to consider if it comes time to terminate the employee’s employment. When an employer decides to dismiss an employee without cause – which is in most cases, as just cause has a high bar to prove in Canada – it owes the employee common law reasonable notice or pay in lieu of notice, unless the employment agreement has an enforceable termination provision limiting the notice entitlement. Reasonable notice is meant to help the employee transition to new employment and its length depends on several factors such as age, the character of the employment, and the job market, and the employer must pay the employee their full compensation package for that period. And if that compensation includes a regular bonus, that may have to be paid as well.
Test for bonus entitlement after without-cause termination
For employers who may not be sure if an employee’s bonus should be included a part of the termination package, the Ontario Court of Appeal set out a test in its 2016 decision Paquette v. TeraGo Networks Inc.: was the bonus an integral part of the employee’s compensation package, and did the bonus plan include any language that specifically removes the employee’s common law entitlement?
As indicated by the Ontario Court of Appeal, even if a bonus is a regular part of the employee’s compensation, it’s possible to exclude it from termination pay if the bonus plan excludes it. But, as is the case with just about anything dealing with termination of employment in Canada, there is a high bar to make such an exclusion enforceable, and copying bonus plans from the US usually won’t do the trick.
A common element of bonus plan contract language is requiring the employee to be “actively employed” at the time the bonus is paid out. However, this phrase can be ambiguous, and, similar to the standard for termination clauses, any ambiguity will be interpreted in favour of the employee.
In the Supreme Court of Canada decision Matthews v. Ocean Nutrition Canada Ltd., the country’s top court overturned a lower court’s ruling that a worker wasn’t entitled to a $1 million bonus from the company’s sale as part of his 15-month notice period because the long-term incentive plan stated that he and to be a “full-time employee” at the time of his entitlement – the sale occurred 13 months after his termination – and that the plan had no value for the purpose of severance pay calculation. The Supreme Court disagreed, finding that the bonus entitlement occurred within the worker’s notice period and, had he been provided with working notice, he would have been an active employee. In addition, the exclusion of the bonus from the calculation of severance pay was ambiguous, because “severance” had a different meaning from “reasonable notice.” The bonus plan didn’t clearly indicate that the bonus was excluded from the worker’s notice calculation, said the court.
An Ontario court reached the same conclusion in Jimmy How Tein Fat v. PRGX Canada Corp.. An employer’s bonus plan had a requirement that the worker be “actively and full-time employed” to receive an annual bonus was ambiguous, since the worker would have been actively employed with proper notice and confirming that the worker should be treated as employed during the notice period when it comes to compensation.
Removing bonus entitlement during notice period
While the above cases demonstrate how inadequately-worded bonus plans usually fail to limit a dismissed employee’s entitlement to a bonus, another Ontario case shows the other side.
In Kielb v. National Money Mart Company, a worker who was terminated without cause claimed a key management bonus – payable at the end of the fiscal year on June 30 – as part of his claim for wrongful dismissal damages. The bonus plan stipulated that the bonus was discretionary, didn’t accrue over the year, and “is only earned and payable at the time it is provided to you by the company.” It also provided examples of situations where the bonus wouldn’t be payable to someone who wasn’t employed at the time.
The worker was terminated two months before the end of the fiscal year and had only 18 months of service. In addition, his employment agreement included a provision limited his notice of termination to eight weeks, meaning that his notice didn’t reach to the end of the fiscal year and the when the bonus was payable. The court determined that the worker wasn’t entitled to the bonus due to the clear wording of the bonus plan, despite the fact that the bonus was a key part of his compensation.
Terminating employees without cause can be an expensive proposition, and more so if there’s a bonus that has to be included. But, like with termination clauses, that expense can be reduced to a certain extent – as long as the exclusion is clear, unambiguous, and doesn’t breach employment standards.