We have previously written about when employees are entitled to receive their bonus at the time of termination.
To recap, when an employee is terminated without cause, they are entitled to receive notice or pay in lieu of notice. The award in a wrongful dismissal claim is meant to place the terminated employee in the same financial position they would have been in had such notice been given. When the court is determining the award in a wrongful dismissal claim, it will typically include all of the compensation and benefits that the employee would have earned during the notice period. However, whether a bonus the employee would have received should be included in such an award is a complicated question.
In the last year, the Ontario Court of Appeal sent a strong message that terminated employees can be awarded post-termination bonuses, even when the terms of the compensation plans in question appear to disentitle employees from receiving their bonus post-termination. For example, in Lin v Ontario Teachers’ Pension Plan, the plan stated that where an employee’s employment “is terminated… prior to payout of a bonus, no bonus shall be earned or payable to the [employee].” In Paquette v TeraGo Networks Inc., the compensation plan stated that the employee must be “actively employed” on the date of payout to receive the bonus. In both of these cases, the Ontario Court of Appeal awarded post-termination bonus payments to the employees as part of their entitlement to payment in lieu of reasonable notice despite the terms in the compensation plan.
Fraser v Canerector Inc.
Mr. Fraser’s employment contract stated that he would be “eligible to participate in [the] employee bonus plan.” The company did not have a written bonus policy, and there was no set formula used to calculate bonuses. The amount of Mr. Fraser’s bonus varied significantly from year to year: during Mr. Fraser’s 3 years at Canerector Inc., he received $50,000, $75,000 and $175,000. He was terminated before his annual bonus assessment.
The motion judge held that Mr. Fraser was not entitled to any bonus mainly because the plan was fundamentally discretionary and based on subjective assessments.
Mr. Fraser appealed this decision to the Divisional Court. Although this Court found that some aspects of the motion judge’s decision had been problematic, it ultimately concluded that the motion judge’s decision was correct: Mr. Fraser had the right to participate in the bonus plan, but there was no contractual entitlement to a specific amount that could be awarded by the Court.
The evidence before the motion judge was that the co-owners of the business, a father and daughter, decided the quantum of the bonus each year. When the daughter assumed responsibility for managing Mr. Fraser, she concluded that Mr. Fraser was not meeting her expectations and decided to terminate his employment. The motion judge concluded there was evidence that Mr. Fraser would have received a bonus, even if he had not been terminated.
The Divisional Court agreed with the motion judge’s decision: Mr. Fraser had agreed that a portion of his remuneration would be subject to a discretionary determination of the value of contributions at year end. Mr. Fraser had to live with the risk of the widely variable compensation system to which he had agreed.
The way in which an employee’s entitlement to, or eligibility for, a bonus plan is drafted can have a significant effect on whether an employee is able to recover their bonus if they are terminated prior to when it is paid out. If you are unsure as to whether you are entitled to your bonus after termination, you should consult an employment lawyer to find out about your rights and entitlements.
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