Employers frequently address the issue of whether a dismissed employee should be paid a bonus that would be paid after an employee’s dismissal but during the period of common law reasonable notice. We now have recent guidance from Ontario’s highest court on this issue

In Paquette v TeraGo Networks Inc., 2016 ONCA 618, the Court of Appeal for Ontario held that a dismissed employee was entitled to a bonus payment that became payable after his dismissal but during the reasonable notice period. This was despite the fact that the employer’s bonus plan required an employee to be “actively employed” on the date of payout to eligible for the bonus.

This was wrongful dismissal case, in which the dismissed employee, Paquette, had brought a motion for summary judgment on the issue of the period of reasonable notice and damages, including his entitlement to a bonus. The motions judge fixed the period of reasonable notice for Paquette at 17 months, and awarded him the salary and benefits he would have received had he been employed for this 17 month period. He rejected Paquette’s claim for lost bonus payments, however, on the basis that the bonus plan required an employee to be “actively employed” at the time the bonus was paid and Paquette, while “notionally” an employee during this reasonable notice period would not be “actively employed”. Therefore, held the motions judge, pursuant to the terms of the bonus plan, Paquette had no entitlement to damages in respect of lost bonus payments.

Paquette appealed on this narrow issue of entitlement to bonus payments that become payable after his dismissal but during the notice period. The Court of Appeal allowed the appeal.

The Court of Appeal held that the motions judge ought to have engaged in an analysis that commenced with the premise that the appellant’s common law right to damages was based on his complete compensation package, including any bonuses; only then should the motions judge have examined whether the bonus plan unambiguously limits or restricts that right. The Court found that the requirement for active employment in the present case was not sufficient to contract out of the common law right to accrue benefits during the reasonable notice period, explaining in no uncertain terms:

“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.”

The Court of Appeal considered a similar issue in Lin v Ontario Teachers’ Pension Plan Board, 2016 ONCA 619. In that case, an employee (Lin) had been dismissed for just cause. The trial judge held that cause had not been established. Lin was accordingly owed wrongful dismissal damages to cover what the trial judge assessed to be a reasonable notice period of 15 months. The trial judge held that any bonuses that would have been payable during this period pursuant to the employer’s short and long term incentive plan were also owed to Lin. As in the Paquette case, this was despite the fact that the plans stated that in the event a participant is dismissed prior to payment of a bonus no bonus shall be paid.

On appeal, the Court of Appeal upheld the trial court’s finding on the basis that the plaintiff’s bonus constituted an integral part of the plaintiff’s compensation and was an amount he would have earned had he not been wrongfully dismissed without reasonable notice.

In these cases, the Court of Appeal has made it clear that unless there is unambiguous contractual language stating otherwise, a dismissed employee will be entitled to be “made whole” during the reasonable notice period. This means that a bonus that would have been payable during that period is presumptively owed. In terms of what language in a bonus plan or contract would suffice in order to displace this common law presumption, the Court of Appeal has held that a requirement to be “actively employed” will not suffice.  Employers are therefore well-advised to review their existing bonus plans and seek advice on drafting any provisions that are intended to address disentitlement to bonus following an employee’s dismissal.

Written with the assistance of Melanie Simon,  articling student.