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An Employee’s Entitlement to a Bonus: Still Unsettled?

Discipline and Dismissals

More often than not, an employee that is dismissed does not receive their bonus for the year in which they were let go. In many cases, they don’t even receive the bonus that has already accrued, such as when they are let go in early 2017, before the 2016 bonuses are paid out. And very rarely do they get a bonus during the notice period. Should they?

Absent an enforceable termination provision in an employment agreement, an employee who is dismissed from their employment on a without cause basis will be entitled to reasonable notice, or pay in lieu thereof, at common law. As we often tell both our employee and employer clients, the purpose of the reasonable notice period is to keep an employee “whole” until they can obtain replacement employment. This means that, by default, an employee is entitled to receive all forms of remuneration during the reasonable notice period that they would have had they continued to work during that time. This includes base salary, commissions, car allowance and all aspects of the employee’s compensation package.

Whether or not an employee is entitled to receive a bonus during the reasonable notice period has been a contentious topic in employment law. The trend seemed to be toward granting of bonuses even when contracts and policies seem to suggest that the employee will not be eligible if they are not “actively employed” when the bonus is  paid out. In Paquette v TeraGo Networks Inc., the Ontario Court of Appeal confirmed that where a bonus is an integral part of the employee’s compensation package, the employee is entitled to receive damages in lieu of the bonus during the reasonable notice period unless there is specific wording in an employment agreement or bonus plan that unambiguously alters or removes the employee’s entitlement. Notably, the Court declined to enforce the language of the bonus plan in Paquette, which required an employee to be “actively employed” at the payout date. As a result, the employee was entitled to his bonus over the 17 month notice period, based on the average of the bonuses that he had received over the previous four years. That case strongly suggested that in the vast majority of cases, a dismissed employee will be entitled to bonuses accrued prior to termination as well as notional bonuses during the notice period.

A very different result was reached recently by the Ontario Superior Court of Justice in Singer v Nordstrong Equipment Limited. Singer was the President and General Manager of the defendant Company at the time his employment was dismissed. He commenced an action seeking damages for wrongful dismissal, and subsequently brought a motion for summary judgment. One of the issues in dispute was whether or not Singer was entitled to payment of his bonus up to the date of termination, as well as during the reasonable notice period.

As part of his compensation package, Singer received an annual bonus which he claimed was “fixed and formulaic”, calculated at 5% of the Company’s annual pre-tax profit. The Company argued that Singer’s entitlement to, and the amount of, the bonus were matters of “pure discretion”. There was no signed employment agreement between the parties, and although a Corporate Culture document provided some information on the payment of bonuses, it did not specifically restrict an employee’s entitlements on dismissal.

The Court found that there was no discretion involved in determining Singer’s entitlement to a bonus – according to the Corporate Culture document, so long as profit was earned, a division would be automatically entitled to a bonus pool to be allocated amongst employees. However, the amount of the bonus was found to be discretionary. From 2010 to 2015, Singer’s bonus payments ranged from 3.87% to 6.02% of base salary, and did not necessary correlate to the size of the total bonus pool.

The Court rejected further arguments from the Company that Singer was not entitled to a bonus based on an email sent to him in 2014 which emphasized the Company’s discretion to award bonuses as it saw fit, and a policy document Singer had been asked to sign shortly before he was dismissed which noted that bonuses were “discretionary”, fluctuated from year to year and “may be zero”. Neither the email or the policy were found to constitute “valid amendments or variations” to Singer’s compensation. As a result, the Court concluded that Singer was entitled to receive his accrued bonus for 2016.

Somewhat surprisingly, however, the Court declined to award Singer damages in lieu of his bonus during the 17 month reasonable notice period, noting that the “purpose of the defendant’s incentive plan is to maximize efforts to generate profits” and that it was not within Singer’s “reasonable expectation to be able to earn a bonus for the 2017 and 2018 fiscal years while he searched for alternative comparable employment”.

Interestingly, the Court also declined to award Singer damages in lieu of the benefits he would have received during the 17 month notice period, noting that Singer had provided no evidence of loss in this regard. The Court also denied another employee’s entitlement to receive damages in lieu of his bonus and benefits during the notice period in a similar case decided a few weeks earlier, Fulmer v Nordstrong Equipment Limited.

The findings of the Court in Singer and Fulmer are interesting, as they appear to go against the principle that an employee who is provided with pay in lieu of notice should, for all intents and purposes, be entitled to receive the same compensation and benefits they would have received had they been provided with working notice. Given that both Singer and Fulmer received payment of a bonus each year which formed a consistent part of their compensation package, and the lack of specific language in an employment agreement or bonus plan that would alter their entitlements at common law, the result in both cases is surprising.

The bottom line is that there continues to be uncertainty regarding entitlement to bonuses after dismissal. Employees should not assume that they are not entitled to such bonuses, particularly where they have already been accrued. We frequently represent individuals that have been told they are ineligible for their bonus, and we often help them to collect it.

The uncertainty in both of these cases could have been avoided through the use of clear, unambiguous language in the bonus policy regarding the entitlements of employees upon dismissal. We regularly assist employers in this regard, so they can control their costs and reduce uncertainty.

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