Williams HR Law LLP

WHEN ARE EMPLOYEES ENTITLED TO BONUS PAYMENTS AFTER BEING DISMISSED?

September 18, 2019

The Ontario Court of Appeal (“ONCA”) recently provided further guidance on the enforceability of termination clauses and wrongfully dismissed employees’ entitlement to damages for the lost opportunity to earn a bonus during the reasonable notice period in Andros v Colliers Macaulay Nicolls Inc. [Andros]. Our blog this week discusses the bonus-entitlement aspects of the Andros decision, and our blog next week will discuss Andros’s implications for the enforceability of termination clauses.

Under the common law, employees are entitled to reasonable notice of termination of their employment, or pay in lieu thereof, unless the employer and employee agree to a lesser notice entitlement that complies with the minimum standards under the Employment Standards Act, 2000 [ESA]. In some circumstances, employees that are dismissed without cause may also be entitled to a pro-rata share of non-discretionary bonuses for the portion of the year that they worked before their employment was terminated, and damages to compensate for the bonus amounts that they would have earned during the reasonable notice period, even where the applicable bonus plan or employment agreement stipulates that the bonus entitlement is contingent upon the employee being actively employed on the date the bonus is payable.

With respect to bonus entitlements, the ONCA held in Andros that a wrongfully dismissed employee was entitled to pro-rata damages for the portion of the bonus that he earned before being dismissed and the portion of the bonus that he would have earned during the reasonable notice period, notwithstanding a clause in his employment agreement restricting bonus entitlement to employees in good standing at the time that the bonuses are payable.

The Summary Judgment Decision

In Andros, the employee brought a wrongful dismissal action against his employer after it terminated his employment without cause, and sought damages in lieu of reasonable notice, including damages for his pro-rata bonus entitlements in respect of the portion of the year that he worked and the reasonable notice period. Although the employee had previously received a bonus every year of his employment pursuant to his employment agreement, the employer did not provide him with any compensation for the bonus that he earned and would have earned during the reasonable notice period in the year in which his employment was terminated.

Notably, the employment agreement between the parties provided that the bonus was only payable at the end of the year to “an employee in good standing with the company at the time bonuses are payable”.

On a motion for summary judgment, the motion judge found that the employee had been wrongfully dismissed and was entitled to 8 months’ pay in lieu of reasonable notice, as well as damages for the pro-rata share of the bonus that he earned before having his employment terminated that year and the bonus he would have earned during the 8-month reasonable notice period, had he remained employed for that period. The motion judge’s decision to award the employee damages in respect of his bonus entitlements was premised upon her finding that the bonus was non-discretionary and formed an integral part of his compensation under the employment agreement.

The employer appealed the motion judge’s decision, arguing that she had erred in awarding the employee damages in respect of his bonus entitlements, among other things.

The ONCA’s Decision

The ONCA affirmed that the employee was entitled to damages in respect of the pro-rata share of the bonus that he earned before the termination of his employment and the bonus he would have earned during the reasonable notice period, and dismissed the employer’s appeal. In particular, the ONCA held that “where a bonus is a non-discretionary and integral part of the employee’s compensation package, damages for wrongful dismissal should include both the bonus actually earned before being terminated and the bonus that would have been earned during the notice period, unless the terms of the bonus plan alter or remove that right”.

Crucially, the ONCA found that the “good standing” clause in the employee’s employment agreement did not remove the employee’s right to damages for pro-rata bonus entitlements because the employee’s claim was “not for the bonus itself, but for the share of the bonus that [he] would have earned had the [employer] not breached the contract of employment”. Consequently, the ONCA found that the question was “not whether the bonus would have been ‘received’ during the notice period, but whether… it was ‘earned’ or ‘would have been earned’ during that period”. The employee was therefore entitled to damages for the pro-rata share of the bonuses he would have earned during the reasonable notice period, notwithstanding the “good standing” clause, because he would have continued to earn bonus amounts during that time had his employer not breached the employment contact by dismissing him without providing reasonable notice.

Finally, the ONCA also stated that parties can contract out of the requirement to pay a portion of a yearly bonus based upon what a terminated employee earned while they worked and would have earned during a notice period, but held that the underlying contract needs to be clear on its face to unambiguously alter or remove the employee’s right to damages for bonus amounts during those periods.

Takeaways

Andros illustrates that employers may be required to compensate employees that are dismissed without cause for the bonuses that they earned before the termination of their employment and bonuses that they would have earned during the reasonable notice period. However, employees will only be so entitled where the bonus is non-discretionary and constitutes an integral part of the employee’s compensation under their employment agreement.

Andros also highlights that a clause in an employment agreement or bonus plan that makes bonus entitlement conditional on active employment on the date of bonus payment will not limit a wrongfully dismissed employee’s entitlement to damages for lost bonuses where the bonus forms an integral part of their compensation. In Andros, the ONCA found that the wrongfully dismissed employee was entitled to pro-rata damages for the bonus he earned before being dismissed and that he would have earned in the reasonable notice period, despite that his employment agreement stated that the bonus was only payable at the end of the year to “an employee in good standing with the company at the time bonuses are payable”, conditions the employee did not satisfy. Accordingly, employers cannot rely on contractual language making bonus entitlement conditional on active employment to disentitle a wrongfully dismissed employee to common law damages for the loss of bonuses they earned or would have earned during the reasonable notice period where the bonus forms an integral part of their compensation.

Andros suggests that employers can contractually agree with employees that they will not be entitled to pro-rata damages for bonuses that they earn before having their employment terminated, and/or would have earned during the reasonable notice period, so long as the parties agree to clear and unambiguous contractual language to do so. Andros makes it clear that there is an important distinction between “bonuses” and damages to compensate an employee for the bonus that they earned or would have earned during the period of reasonable notice. Therefore, employers would be well advised to consider including language in their employment agreements and/or bonus plans that clearly and unambiguously disentitle employees to such amounts in order to minimize their termination-related exposures.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.

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