What happens if an employee gets fired without cause before his or her bonus gets paid? What if the employment contract says that to receive the bonus, the employee must still be employed at the time it’s paid out? The answers might surprise you.
Integral and Discretionary
My colleague Richard Johnson has previously covered the bonus “basics” in a LinkedIn article here. Put simply, for a dismissed employee to claim that his or her severance should include compensation for a lost bonus, the employee must show that the bonus was an integral and non-discretionary part of his / her compensation package. In doing so, the employee establishes that s/he has a common law right to the bonus s/he earned or would have earned but for the dismissal.
The next hurdle is to overcome any language in the employee’s employment contract that would appear (the operative word here) to disentitle the employee to the bonus on dismissal. As Richard noted, many employers have started to include clauses in their employment agreements or bonus policies that require an employee to be “actively employed” to receive any bonus.
However, courts across Canada, including BC, have generally concluded that the “active employment” requirement is not enough to take away an employee’s right to the bonus over the notice period. As the Ontario Court of Appeal explained in its 2016 decision in Paquette v. TeraGo Networks, a term that requires “active employment” when a bonus is paid, without more, is not enough to disentitle an employee to the bonus they would have received had they still been employed during the notice period.
Andros v. Colliers Macaulay Nicolls
Recently, Ontario’s appeal court shed further light on the issue of bonus entitlements on dismissal. Specifically, that court’s 2019 decision in Andros v. Colliers Macaulay Nicolls Inc. reveals the importance of both fairness and transparency when it comes to whether a severance payment or notice award should include a bonus component.
At the trial of Mr. Andros’ wrongful dismissal action against Colliers, the judge concluded that his bonus was an integral and non-discretionary part of his compensation package and that he was entitled to compensation for the bonus he earned while he was still employed, and for the bonus he would have earned during the eight month notice period he was entitled to at common law.
Colliers appealed this decision, relying on the clause in the employee’s agreement that stated that to receive a bonus, he needed to be “an employee in good standing with the company at the time the bonuses are payable”. The employer argued that, even if “in good standing” had the same meaning as “actively employed”, the Paquette decision didn’t apply here since Mr. Andros’ bonus was actually payable after the eight month notice period was over.
The Court of Appeal did not agree. The Court not only specifically affirmed that the reasoning in Paquette applied to Mr. Andros’ case, it also considered other hypothetical dismissal scenarios to underscore the “inherent unfairness” that would arise if it distinguished Andros on the basis that the bonus was payable after the notice period ended.
In particular, the Court gave the example of a short term employee who was dismissed shortly before payment of their bonus and who was only entitled to a few weeks notice. To accept Colliers’ argument in such a case would be to prevent the employee from seeking damages for a pro rata share of their bonus for the several months of work they completed up to December and the short notice period that followed. As the Court pointed out, “the greater the bonus in relation to the employee’s overall compensation and the shorter the notice period, the greater the unfairness of the situation”.
In dismissing Colliers’ appeal and affirming the trial judge’s decision that Mr. Andros was entitled to receive an amount equal to the pro rata bonus he would have earned during the 8 month notice period, the Court of Appeal made these key findings:
- If a bonus is an integral aspect of an employee’s compensation then, on dismissal, the employee has a common law entitlement to the bonus s/he earned or would have earned.
- The only way that an employer and employee can contract out of this common law right is to include unambiguous language in the employment contract or bonus plan that alters or removes this common law right. There was nothing in Mr. Andros’ agreement to suggest that the parties had contracted out of his common law right to damages for lost bonus potential following dismissal. In other words, the “good standing” clause was not unambiguous.
- Absent a contracting out, allowing for common law damages that include compensation in lieu of a pro rata share of a bonus in circumstances where the bonus is an integral part of the compensation package is the only sensible approach.
- Finally, the question is 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.
So what are the key takeaways from this case for employers who use incentive plans as part of their compensation packages?
- Be clear, specific and unambiguous. If you want to remove an employee’s common law right to damages for lost bonus on dismissal, say so unambiguously in your contracts or bonus plan. Consult with an employment lawyer to make sure you get it right.
- Be fair. If you don’t have such a clause in your contract or plan and you need to dismiss an employee who has a right to a lost bonus as part of their severance / notice entitlements, don’t try to avoid paying the bonus through the timing of termination. Not only is it not fair to your employee, it has the potential to come back and bite you later.
Have questions about your bonus plans? Contact us!