27 Jan 2017
January 27, 2017

BONUSES ON TERMINATION

In a wrongful dismissal action the amount of damages will be determined by the court on the basis of putting the employee “in the same position as he would have been if he had been given reasonable working notice.”  In most cases the key compensation component is salary so that is easily determined.  But in many cases employees are also paid bonuses.  The question then becomes whether the employee is also entitled to a bonus during the notice period including a pro rata bonus.  Two recent Ontario court decisions demonstrate that the issues may not be all that straightforward.

Paquette v TeraGo Betworks Inc.

In Paquette v TeraGo Netorks Inc. the employee sued for wrongful dismissal and was awarded damages based on a 17 month notice period.  He was entitled to a bonus but the bonus plan required that the employee be “actively employed” at the time of payout.  The trial judge held that although the bonus was an integral part of his compensation Mr. Paquette was not entitled to a bonus payment during the notice period.  The Court of Appeal reversed that decision.

It held that first the bonus was an integral part of Mr. Paquette’s employment and compensation and therefore if he had been given 17 months working notice he would have received a bonus.  The question was whether bonus plan itself precluded him from being awarded damages for loss of the opportunity to earn the bonus.  The court described the proper analysis as follows:

Similarly, in the present case the appellant’s claim was not for the bonuses themselves, but for common law contract damages as  compensation for the income (including bonus payments) he would have received had TeraGo not breached his employment contract by failing to give reasonable notice of termination.

[24] The motion judge’s next error was in looking to the terms of the bonus plan, and its requirement of “active employment”, and then concluding that because that term was unambiguous, and the appellant could not meet the requirement, no amount for bonus would be included in his damages. The motion judge ought to have commenced his analysis from the premise that the appellant’s common law right to damages was based on his complete compensation package, including any bonus he would have received had his employment continued during the reasonable notice period, and then examined whether the bonus plan specifically limited or restricted that right.

The court stated the test here was not properly applied by the trial judge:

A term that requires active employment when the bonus is paid, without more, is not sufficient to deprive an employee terminated without reasonable notice of a claim for compensation for the bonus he or she would have received during the notice period, as part of his or her wrongful dismissal damages.

Mr. Paquette was therefore awarded a bonus payment for 2014 and compensation for the lost opportunity to earn a bonus in 2015 that would have been payable in 2016.  The court relied on the average bonuses from the previous three years and awarded him $58,386.64 plus interest.

 

Fraser v Canerector Inc.

Mr. Fraser worked as a senior executive for the employer for 2.8 years when he was terminated without notice.  He obtained alternate employment fairly quickly.  He was awarded damages based on 4.5 months notice.  He participated in an executive bonus program each year earning $50,000 in his first year then $75,000 and then $175,000 in his last full year of employment.

The court held that Mr. Fraser was not entitled to any bonus for 2014 as the notice period expired in October 2014.  The court stated:

The question the court must ask when bonus is claimed as part of compensation in a wrongful dismissal case is whether any identifiable amount of bonus is a contractual entitlement of the plaintiff.  In this case, I cannot conclude that the plaintiff was entitled to any such amount.  There is no formula that the court is in any position to apply, objectively or otherwise.  Any amount or methodology posited by the plaintiff (or the court) would be as arbitrary and thus subject to the same criticism as the plaintiff makes regarding his exclusion from bonus awards in 2014.

[58]  I reach this conclusion both because the bonus plan in question implicitly required participants to be employees at the time the assessment process is undertaken after year end and because the plan itself was fundamentally discretionary and subjective, lacking any formula which a court might objectively apply.  For both reasons, there is no amount of bonus to which the plaintiff was contractually entitled as of June 10, 2014 when his employment was terminated or as of October 25, 2014 when his 4.5 months of reasonable notice would have expired.

[59]  The following considerations lead me to the conclusion that only employees who were still active, contributing employees after year end had any rights to be considered for bonus:

a.  The plaintiff’s prior employment agreement expressly conditioned eligibility upon employment at the time of declaration of the bonus and the parties specifically negotiated Mr. Fraser’s starting time with the defendant in order to ensure he would be able to qualify for that bonus from his prior employer in a plan which was formula-driven – this may be relevant to the reasonable expectations of the parties as regards the requirements of the defendant’s discretionary bonus program without any prescribed formula, floor or ceiling;

b.  While the defendant had communicated no written bonus policy expressly excluding the eligibility of departing employees, the plaintiff was advised that his salary was reviewed annually in February and he was also aware that his contributions were reviewed and bonus amounts announced at the same time;

c.  The program was described (and understood by participants) as being discretionary, employing no fixed formula and based upon the subjective assessments of contribution by the owners (Mr. Hawkins and his daughter) which were communicated confidentially along with each award.

LESSONS LEARNED

Bonuses are often a large part of compensation and can be very useful tools in motivating employees to perform at the highest standards.  But as can be seen from these cases care in drafting the bonus schemes and employment contracts is crucial to ensure the employer’s liability is limited during the notice period.

 

Michael Weiler practices employment and labour law including human rights and prevention of workplace harassment/bullying and independent investigations; advising on the practical and legal issues affecting private family-owned businesses; and more – see his website at www.WeilerLaw.ca .   Michael is a frequent seminar presenter and the assistant editor of Canadian Cases on Employment Law.  Michael can be contacted at mweiler@weilerlaw.ca  . For those who wish to receive articles, seminar notices and blog comments please contact Carolyn Weiler at cweiler@weilerlaw.ca  or call her at 604 336 7427.

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