Where an employee is terminated or resigns, what is the effect of a bonus plan that requires the employee to be “actively employed” at the time the bonus is paid out in order to receive it?  The Ontario Court of Appeal released two decisions, only one year apart, that reached seemingly opposite conclusions to this question.

2016 Case – Employee Entitled to Bonus after Termination

Mr. Paquette worked for his employer for 14 years, until he was terminated without cause. In each of the 4 years prior to his termination, he received bonuses and these bonuses were an integral part of his compensation. Upon termination, Mr. Paquette brought an action for wrongful dismissal and was awarded 17 months’ pay in lieu of reasonable notice. Damages were based on his salary and benefits but excluded any amount for the loss of his bonus through the reasonable notice period. During this notice period, Mr. Paquette would have been entitled to 2 more bonus payments had he remained employed. The bonus plan that Mr. Paquette participated in required that he be “actively employed” on the date of the bonus payout. Since the lower court denied Mr. Paquette’s claim for compensation for lost bonuses, Mr. Paquette appealed.

Two Step Approach

The Court of Appeal found that the lower court erred by focusing too narrowly on whether the term “active employment” was ambiguous. Instead, this Court followed a two-step approach from a previous case. The court reiterated that the proper way to analyze an employee’s claim is:

1. consider the employee’s common law rights to damage for breach of contract; then
2. consider whether wording of the bonus plan unambiguously alters the employee’s common law rights.

The Court found that the the wording of Mr. Paquette’s bonus plan did not limit his right to receive compensation for his bonus during the reasonable notice period. Thus, Mr. Paquette had the contractual right to work and to be paid his salary and receive benefits throughout the entire notice period. The only reason Mr. Paquette was not “actively employed” on the bonus payout dates was because the employers breached his contract by terminating him without proper notice.

The Court found that a bonus plan requiring an employee to be actively employed when the bonus is paid is not sufficient, on its own, to limit entitlement to a bonus for an employee terminated without cause.

2017 Case – Employee Forfeited Bonus after Resignation

Mr. Bois worked for his employer for approximately 14 years, until he resigned in 2011. In both 2009 and 2010, he was awarded bonuses under his employer’s variable incentive plan (“VIP”). The VIP stated that a bonus awarded for a year was payable in equal installments over the 3 years following the calendar year for which the bonus was awarded.

The 2007 VIP stated that in the event that an employee’s “continuous Active Employment” terminates, the employee will immediately forfeit any entitlement to payments under this plan. Similar language was presented to Mr. Bois in a 2010 letter and an updated VIP in 2011. When Mr. Bois resigned, it was before the payout dates for the final installment of his 2009 bonus, and the two installments of his 2010 bonus. These future installments totalled nearly $115,000.

Parties May Contractually Agree to When Bonus was Payable

The lower court judge concluded that the VIP required an employee to be actively employed with the company on the date of a bonus installment pay-out in order to receive it. Therefore, if an employee resigned before that incentive payment date, they would not be eligible to receive payment. Further, the fact that Mr. Bois had notice of the active employment eligibility requirement on multiple occasions contributed to the conclusion that he ought to have known that he was forfeiting his entitlement to the bonus upon resignation.

On appeal, the Court upheld the lower court judge’s decision. Further, Mr. Bois unsuccessfully relied on sections 11(5) and 13(1) of the Employment Standards Act (“ESA“) to argue that he was entitled to his bonus.

The Court of Appeal agreed with the lower court as well as previous cases that it was open to the parties to agree how and when any bonus was declared, earned, accrued, and would be payable. Further, bonus payments were found not to fall under “wages” as they are not regularly scheduled wage payments in s. 13(1). Therefore, The VIP’s requirement that an employee be actively employed at the time of a future pay-out was found not to violate the ESA.

Can these Decisions be Reconciled? Maybe

These two decisions seem to reach opposite conclusions. However, the underlying question in both cases is, what would the employee have received during the common law period of reasonable notice had he continued to work through that period?

The general rule is that when an employer dismisses an employee without reasonable notice of termination, the employee is entitled to compensation for all lost pay during the appropriate notice period. However, bonus plans with language stating that employees must be “actively employed” to receive their bonus is meant to avoid having to pay out bonuses to terminated employees.

The Paquette case suggests that total compensation is generally the rule, especially where the bonus is an integral part of the employee’s compensation. Bois clarifies that the employers and employees have discretion to agree to a bonus plan which limits the employee’s common law right to have bonus awards included in their wrongful dismissal damages. There are some key differences between the two cases that may contribute to the different conclusions. For instance, Mr. Paquette was terminated without cause while Mr. Bois resigned. Further, Mr. Bois was made aware of the limiting provisions in his VIP on several occasions.

What does all this mean? Where a bonus plan exists, its terms will often be important in determining the bonus component of a wrongful dismissal damages award. For more information on whether your bonus plan effectively limits an employee’s common law right to bonus compensation in wrongful dismissal damages, you may contact an employment lawyer at MacLeod Law Firm. You can reach us at [email protected] or 647-204-8107.