A recent case decided by the Ontario Court of Appeal demonstrates yet again that relying on informal understandings with an employee about their rights on termination is a very bad idea.

In this case, a 51-year-old President was terminated after a little more than 11 years of service.

Judge Concludes 51-year-old Employee with 11 Years Service is Entitled to 17 Months Notice of Termination

The employee did not sign an employment contract so he was entitled to reasonable notice of termination. A well drafted termination clause would have limited the employer’s exposure to 8 weeks notice of termination. Without it, the trial judge concluded he was entitled to 17 months common law notice of termination.

Court of Appeal Concludes the Employee was Entitled to a Bonus Despite the Employer’s Past Practice

The employee claimed he was entitled to a bonus during the 17-month notice period. The trial judge disagreed. However, the Court of Appeal overturned the trial judge’s decision on this issue. The Appeal Court concluded that even though the employer’s practice was not to pay a terminated employee a bonus, he was nevertheless entitled to a $166,945 bonus. In this regard, the Court restated the law as follows:

1. Was the bonus an integral part of his compensation package, triggering a common law entitlement to damages in lieu of bonus?; and
   
2. If so, is there any language in the bonus plan that would restrict his common law entitlement to damages in lieu of a bonus over the notice period?

Lessons to be Learned:

1. All employees, but especially high paid executives, should be required to sign an employment agreement with a termination clause. Reasonable notice periods for older employees seem to be going up and often exceed one month per year of service. 
2. All variable compensation plans should clearly set out an employee’s rights under the plan when his or her employment is terminated. There are several recent Appeal Court decisions which have strictly read contractual language against the employer. These plans should be reviewed by an employment lawyer regularly.

For over 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 directly at 416-317-9894 or at [email protected]