Are terminated employees entitled to discretionary bonus awards?

Posted on February 17, 2017 · Posted in Blog

Many employees in today’s workforce receive a significant portion of their income in the form of bonus payments and incentives. When the employer terminates the contract of employment without cause, a relevant notice period is statutorily prescribed Employment Standards Act 2000, and/or by common law. What is often less clear is whether an employee is entitled to accrued bonuses not yet paid on the date employment is terminated.

The default assumption is that pay in lieu of notice should not just be limited to base income, but to all benefits and forms of compensation that comprise the income of the terminated employee during the relevant notice period. This most often includes health benefits, disability coverage, car allowances, defined benefit and/or defined contribution retirement plans, and bonus payments to be payable after the date of termination and during the relevant notice period.

This presumption, however, does NOT mean that an employee is entitled to a bonus payment as an automatic right. If the original contract of employment restricts the payment of a bonus only to employees during their actual course of employment, terminated employees may not be eligible to accrued bonuses during their notice period.

Kielb v National Money Mart Company, 2015, is an illustrative case. In this example, the terminated employee was a lawyer, and the main issue was whether the annual bonus pay provisions of 30 per cent of his annual base salary, and in some cases up to 60 percent of his annual base salary.

The original contract of employment did have a clear and unambiguous clause that did limit the payment of the bonus only to the period of active employment, and waiving any such entitlements to a bonus payable beyond the date of termination. It read in part as follows:

Any bonus which may be paid is entirely at the discretion of the Company, does not accrue, and is only earned and payable on the date that it is provided to you by the Company. For example, if your employment is terminated, with or without cause, on the day before the day on which a bonus would otherwise have been paid, you hereby waive any claim to that bonus or any portion thereof. In the event that your employment is terminated without cause, and a bonus would ordinarily be paid after the expiration of the statutory notice period, you hereby waive any claim to that bonus or any portion thereof.

The court found that the clause was clear, and that it would be wrong for them to overturn it on the grounds of public policy. The employee, in this case a lawyer, did know when signing the contract of employment that there was a chance he would be forfeiting part of the bonus as clearly stated in this clause which spelled out its less favourable consquences.

If the limiting clause is not clear in its wording and intent, any ambiguities in terms of whether discretionary bonuses are to be paid will be construed in favour of the employee. Paquette v. Terago Networks Inc. is an instructive case in point. At a summary judgment motion, the motions judge did find that a seventeen month notice period did apply, but that he was not entitled to any bonus during the seventeen month notice period because he was not an “active employee” at the time.

The Court of Appeal overturned this decision and found that the bonus did in fact apply during the notice period. Absent “specific wording in the bonus plan that that unambiguously (emphasis added) alters or removes the employee’s common law entitlements”, the presumption favours the employee. In Paquette, this effectively meant that the employee (appellant) was entitled to his lost bonus accrued during the seventeen month notice period, and the mere reference to “active employment” was not specific enough to limit the employee’s bonus entitlement.

In sum, employees unsure as to whether accrued bonuses not yet paid at the date of termination are payable must revert to their original contract of employment to find out the right answer. Absent an explicit, clearly worded clause waiving the right to discretionary bonuses, the balance tips in favour of the employee.

At the same time, employees should not expect employers to bend if they did sign a contract of employment with a limiting and unfavourable clause! That’s why it’s always very important to carefully read, review, and seek independent legal advice before signing any binding legal contract.

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