August 16, 2016 By: Dana Du Perron
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With its recent decision of Paquette v. TeraGo Networks Inc., the Ontario Court of Appeal offered some much-needed clarification regarding the payment of bonuses during the reasonable notice period.

Before this decision, the case law appeared mixed on this issue in cases where the language of the bonus plan required that an employee be “actively employed” in order to receive payment of a bonus. For employee-side counsel, this rationale seemed unfair and unlawful: it essentially encouraged employers to terminate employees without working notice before a bonus payment would normally be paid. In so doing, the employer would avoid paying out a potentially significant entitlement, which may have already been earned, depending on the timing of the termination and the length of the reasonable notice period.

In Paquette, however, the Court of Appeal took steps toward remedying the injustice imposed by some of the case law. It did so by noting that a plaintiff’s claim in any wrongful dismissal action is not for the lost bonuses themselves, but for damages to compensate the employee for the loss of the bonuses, since he or she was denied the opportunity to qualify for them when the employer failed to provide reasonable notice, thus breaching the employment contract.

Accordingly, the Court of Appeal determined that the motions judge in Paquette had erred in law by focusing on the unambiguous requirement of active employment included in the bonus plan. In so finding, the motions judge determined that the plaintiff was not entitled to payment of the lost bonus during the 17-month reasonable notice period, given that, as a result of his termination, he was no longer actively employed.

According to the Court of Appeal, the motions judge should have focused on whether the language of the plan and the requirement of “active employment” effectively limited the employee’s common law entitlement to be compensated for all his losses during the notice period. In this case, there was no question that the plaintiff was aware of the terms of the plan and the requirement that he be actively employed in order to receive his bonus.

While ultimately the Court of Appeal found that the language of the plan did not oust the employee’s common law entitlement, bonus plan language will still be crucial to an assessment of an employee’s entitlements upon termination.

Following its own rationale in Taggart v. Canada Life Assurance Co., the Court of Appeal held that a two-step analysis is required in assessing whether a common law entitlement to damages is extinguished by the language of a bonus plan.

Step one of the analysis is to consider the employee’s common law right to damages for breach of contract, while step two is to determine whether the plan alters or removes that common law right.

Just as a properly drafted employment agreement can limit an employee’s entitlement to common law reasonable notice, a properly drafted bonus plan can limit an employee’s entitlement to damages for lost bonus or lost opportunity to earn a bonus during the reasonable notice period. Presumably, the language of such plans will now be the focus of attacks by employees as courts grapple with determining just what type of language is sufficient to oust the common law entitlement to damages for unpaid bonuses.

While little judicial focus has yet been placed on how such plans fit in with the requirements of the Employment Standards Act, 2000, it is possible to analogize from the requirements courts have imposed for termination clauses. Therefore, we can presume that bonuses that would have been payable during the statutory notice period must not be extinguished by contractual language. As well, any clause that attempts to limit the payment of a bonus that would have been payable during the statutory notice period will be invalidated, thereby entitling an employee to seek his or her common law entitlement. 

Furthermore, where the terms of the plan are not incorporated into the employee’s employment agreement or specifically drawn to the employee’s attention, regardless of whether the terms of the plan are sufficient to extinguish the common law entitlement, the employee may have a ground of attack against the plan language in pursuit of his or her common law entitlement to damages.

In this decision, the Court of Appeal did not comment on the treatment of earned but unpaid bonuses specifically, and whether language in a bonus plan that requires active employment and adequately ousts a common law entitlement will eliminate an employee’s entitlement to an accrued but unpaid-at-the-time-of-termination bonus entitlement. While this should be touted as a victory for employees, the law surrounding the treatment of bonuses will likely continue to garner attention in the coming years as we seek out answers to lingering questions.

If you have any questions about your own bonus, contact our Employment Law Group today.

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Employment Law