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In a pair of precedent-setting decisions, Ontario's Court of Appeal has awarded terminated employees bonuses they would have otherwise earned had they not been terminated.
These decisions will come as a surprise to U.S.-based employers. Indeed, they run contrary to the practice of many, if not most, Canadian employers, which is not to award bonuses to employees who have been terminated. However, these cases should cause employers in Canada to reconsider how they treat prospective bonus payments to employees who have been terminated, as well as to consider how liability for such payments can be avoided.
In both cases, the former employees participated in bonus and incentive plans that had conditions which appeared to disqualify them from receiving any bonus payments following termination of their employment.
In Paquette v. TeraGo Networks Inc., the bonus plan stated that the employee must be "actively employed" on the date of payout to receive the bonus. In Lin v. Ontario Teachers' Pension Plan, the plan stated that where a worker's employment "is terminated … prior to payout of a bonus, no bonus shall be earned or payable."
Despite this language, the court ruled that the employees were owed the bonus payments as part of their entitlements to pay in lieu of reasonable notice under the common law.
In Canada, unlike the United States, employees are entitled to "reasonable notice" of termination under the common law unless they have a contract that specifically defines what their entitlement is upon termination of employment.
The amount of notice that is awarded in each case is not determined by a formula. Rather, the courts have broad discretion to determine how much notice is "reasonable" in the circumstances. The main factors the courts consider include length of service, nature of the employment, the employee's age and the employee's re-employment prospects.
Notice periods can vary widely. Short-service employees may receive as little as a couple of months of notice while long-service employees sometimes receive as much as two years of pay in lieu of notice from the courts.
When an employee is terminated without notice, the employee can sue for the total compensation, including bonus payment, that the employee would have otherwise received during the notice period if reasonable notice had been given.
However, some bonus and incentive plans state that an employee must be employed at the time the bonus is to be paid in order to receive it. In some prior cases, the courts have considered the terms of the plans and whether they explicitly ruled out further payments or grants of options post-termination. If the wording of the plan was clear enough, the employee could be disentitled from any further payments post-termination. In other cases, employees were awarded post-termination bonuses even when the plans on their terms required the workers to be employed as a condition of receipt of these payments.
This split in the case law was considered by the court in these decisions and has now apparently been resolved in favor of employees, at least in Ontario, barring a successful appeal to the Supreme Court of Canada.
Paquette v. TeraGo Networks Inc., 2016 ONCA 619 (CanLII) (Aug. 9, 2016), and Lin v. Ontario Teachers' Pension Plan, 2016 ONCA 619 (CanLII) (Aug. 9, 2016).
Professional Pointer: With these decisions, employers will have a hard time avoiding the payment of bonuses that an employee terminated without notice would have earned during the applicable notice period, no matter what the bonus plan says.
While courts in Canada outside of Ontario are not bound by these decisions, they will likely serve as strong persuasive authority for courts in other provinces. As a result, employers in other provinces may also find themselves owing terminated employees bonus payments.
Landon Young is an attorney with Stringer LLP, the Worklaw® Network member firm in Toronto.
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