Disputes Over Bonus Entitlements: Two Decisions on the “Active Employment” Requirement for Bonus Payouts

Nov 27, 2018

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.

There are many ways to attack the termination clause in an employment contract. 

I am now surprised if employee counsel does not claim that their client’s  termination clause is not legally enforceable - usually because the termination clause does not allegedly comply with the Employment Standards Act.

This blog considers a case, McKercher v Stantec Architecture Ltd., 2019 SKQB 100, where an employee successfully attacked the termination clause in his contract because he did not explicitly agree to it after being promoted. 

The Facts

In 2006, Mr. McKercher commenced employment as a staff architect. The termination clause in his employment contract stated: 

Termination other than for cause will be with notice or pay in lieu of notice, based on your length of service. If the Employer terminates your employment for other than just cause you will receive the greater of:

  1. a)   Two weeks notice or pay in lieu of notice during the first two years of employment increasing by one week for each additional completed year of employment to a maximum of three months notice or pay in lieu of notice.

      or

  1. b)   The minimum notice of termination (or pay in lieu of notice) required by applicable statutes.

Eleven years later, when Mr. McKercher was employed as a Business Centre Sector Leader, his employment was terminated. The employer paid him the three months termination pay he was owed under his employment contract.

 

Another way to attack a termination clause: What is the changed substratum doctrine?

An Ontario judge in a 2012 case, MacGregor v National Home Services, 2012 ONSC 2042 (CanLII), described this legal doctrine as follows: "The changed substratum doctrine … provides that if an employee enters into an employment contract that specifies the notice period for a dismissal, the contractual notice period is not enforceable if over the course of employment, the important terms of the agreement concerning the employee’s responsibilities and status has significantly changed."

 

The rationale for this doctrine has been described by one judge, Schmidt v AMEC Earth & Environmental Ltd., 2004 BSCS 2012 (CanLII), as follows: "In my view, it was incumbent on the defendants to advise Mr. Schmidt that they intended to continue to rely upon the termination provision set out in the Agreement when substantial changes in his employment occurred. This would have allowed him to consider the matter and to negotiate for other terms. If the defendants wished to continue to rely on the termination provisions there ought to have been a ratification of the provisions as the nature of Mr. Schmidt’s employment changed."

 

Decision

The judge hearing this case relied on the following factors when deciding not to enforce the termination clause in the employment contract: ”...there is no evidence that (the employer) made it clear to the (employee) that the notice of termination provisions were intended to apply to the positions to which he was promoted. The employment agreement contains no express wording to this effect, nor does it contain any wording to support the inference of such an intent. Further, and in keeping with the analysis in Schmidt, the Court received no evidence that, as it promoted the plaintiff, SAL reasserted its understanding and expectation that the notice of termination limit would remain in effect.”

 

Lesson to be learned:

An employer should make it clear that the termination clause in an employment contract applies when an employee is promoted. This expression of this intent should be in writing and should be clear and unambiguous. I recommend that an organization’s employment be reviewed by an employment lawyer every year or two. If your employment contract does not address this issue then think about doing so the next time it is reviewed.

 

For 30 years, Doug MacLeod of   the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

 

k

Recent Posts

Toronto Office

702 - 2 Bloor Street West,
Toronto, ON M4W 3E2

Barrie Office

277 - 92 Caplan Avenue,
Barrie, ON L4N 9J2

Collingwood Office

220 - 1 First Street
Collingwood, ON
L9Y 1A1

Contact

Phone

+1 (888) 640-1728

Fax

(866) 883-8445

Email

[email protected]

Toronto Office

702 - 2 Bloor Street West, Toronto ON M4W 3E2

Barrie Office

277 - 92 Caplan Avenue, Barrie ON L4N 9J2

Collingwood Office

220 - 1 First Street, Collingwood, ON L9Y 1A1

Translate

Subscribe To Our Newsletter

Join our mailing list to receive the latest news and updates from our team.

You have Successfully Subscribed!