Termination and Entitlement to Bonus Payments.

Determining whether an employee is entitled to bonus payments following termination requires close consideration of the employment agreement or bonus plan language and whether the bonus payment is an integral part of the employee’s compensation package. If it is, then consideration moves to whether the terms of the employment agreement or bonus plan unambiguously take away or limit that common law right? [emphasis added]

The courts have determined the following bonus plan language, without more, to be insufficient to displace the employee’s common law entitlement to damages for bonus payments; namely:

• language requiring “active employment” on the date of bonus payout;
• language stating that no bonus shall be earned or payable “where an employee resigns or the employee’s employment is terminated” prior to the payout of a bonus; and
• language purporting to remove an entitlement to the bonus upon termination “with or without cause” similarly did not remove the right to damages for loss of the entitlement to earn that bonus during the reasonable notice period.

The courts reasoned that using termination as a basis for nullifying entitlement is in effect, the same as a requirement of “active employment “at the date of bonus payment. Moreover, for the purposes of calculating wrongful dismissal damages, the employment contract is not treated as “terminated” until after the reasonable notice period expires.

Recently, the Court of Appeal considered bonus payment entitlements on termination in the following two cases:

In Nader v University Health Network, 2022 ONCA 856, the employment agreement in question provided for discretionary performance-based bonus up to 25% of salary. In determining whether the employee was entitled to bonus payment over the termination notice period, at issue was the meaning of “salary” which was undefined in the employment agreement. The employee successfully argued that bonus was a substantial and integral part of overall compensation and salary. The court held that the termination deprived employee of opportunity to earn bonus over the reasonable notice period and it was reasonable to infer he would have otherwise earned it. 

In Celestini v Shoplogix 2023 ONCA 131, the court reasoned that the use of the words “employment terminates” and “termination of employment’” in the bonus agreement, must mean a lawful termination and a lawful termination only takes place at the end not the beginning of the reasonable notice period.  Further, it called the period between the end of the last bonus period and the termination the “stub period” and held the employee is also entitled to a bonus both for the stub period and the reasonable notice period. In calculating the appropriate amount of bonus, the court determined that use of a three-year average was a proper method of calculating the bonus for the notice period where there is no evidence of what the bonus would have otherwise been.

Key Takeaways:

• Damages for wrongful dismissal generally includes all compensation and benefits that the employee would have earned during the notice period, which may include bonus payments the employee would have been entitled to had they continued to be employed during the notice period.

• Determining entitlement to bonus payments will always depend on actual language of the employment agreement. A well drafted bonus plan in an employment contract can assist employers in limiting an employee’s bonus entitlement upon termination.

Paquette v. TeraGo Networks Inc., 2016 ONCA 618

Lin v Ontario Pension Plan 2016 ONCA 619

Matthews v Ocean Nutrition Canada Ltd. 2020 SCC 26, see also Veer v Dover Corp (Canada) Ltd. (1999) 120 O.A.C. 394)