Suppose you were recently let go from your employment after 2 years. You previously signed an employment contract that stated if you were dismissed without cause, your employer would have to pay you one month of “salary” for each year of service. Would this limit your entitlements to base salary alone? Or does it include other parts of your compensation, such as your bonus?
The recent Court of Appeal decisions of Maynard v. Johnson Controls Canada LP and Nader v. University Health Network suggest that “salary” doesn’t mean base pay alone, and that the employer could be liable for other elements of compensation, including bonus payments.
Common Law vs. Contractual Entitlements
In the absence of an enforceable termination clause, an employee who is dismissed without cause will be entitled to reasonable notice of termination pursuant to common law. As a general rule, and in absence of a contract that says otherwise, the employee’s common law entitlements include compensation for:
- benefits, and
- all other compensation they would have received during the reasonable notice period.
Common law entitlements can be displaced by a termination clause contained in an employment contract. This requires the termination clause to be enforceable, and what is legally enforceable can change over time. While termination clauses are often used to limit an employee’s entitlements, they can also be mutually beneficial by:
- avoiding uncertainty and specifying a fixed amount of notice to pay upon termination, or
- by containing a formula to easily determine these amounts.
The Court of Appeal decisions of Maynard and Nader both concern the employee’s contractual entitlements, rather than their common law entitlements, through interpreting the terms of the termination clauses contained in their employment agreements.
The Maynard Decision
In Maynard, the employment contract stated that upon termination, the employee would be entitled to his minimum statutory entitlements, and in addition, he would be provided with:
“…a lump-sum payment equivalent to 4 weeks of pay based on your salary for each completed year of service…” [emphasis added]
Based on his 14 years of service, this additional entitlement amounted to 56 weeks. The Court was tasked with determining whether this 56 weeks of pay “based on [his] salary” was limited to only the base pay, or also included his bonus and the value of his restricted share units (“RSUs”), which constituted 37% of his compensation package.
Both the lower Court and the Court of Appeal found that the contractual entitlement to 56 weeks of pay “based on your salary” in fact included the bonus and value of RSUs, and not only the base salary.
The Nader Decision
In Nader, the employment contract stated that upon termination without cause, the employee was to be provided payment “of an amount equal to 12 months salary”. The term “salary” was not defined in the contract. The Court was tasked with determining whether the payment of 12 months salary included payment of the employee’s discretionary performance-related bonus, targeted at 25% of his base salary.
The lower Court declined to award the employee any amount for the bonus, finding that there was no evidence in terms of the employee’s performance, and whether he would have been eligible for the bonus (either 25% or some lesser amount) or not.
The Court of Appeal disagreed and overturned the lower Court’s decision on the bonus. The Court of Appeal found that there was sufficient evidence about the employee’s entitlement to the bonus: namely that he was paid bonuses of approximately 25% for 2018 and 2019, and slightly less on a pro-rated basis for 2020, up to the termination of his employment.
Based on this, the Court of Appeal found that the bonus was a substantial and integral part of his overall compensation, and that it is reasonable to infer that he would have earned the bonus if his employment had continued. The fact that the bonus was “discretionary” did not change that finding.
Accordingly, the Court of Appeal ordered that the employee was entitled to not only 12 months of base salary, but an additional 25% of that amount towards his annual bonus.
In both the Maynard and Nader decisions, the Court of Appeal interpreted the term “salary” to include not only base salary, but other elements of the employee’s compensation as well.
These cases highlight the need to seek legal advice when entering into an employment contract. If you are an employer, our firm can assist you in preparing well drafted employment agreements, so that you are not caught by surprise when the employee claims additional entitlements that you did not expect. If you are an employee that is asked to sign an employment contract, it is critical that you seek legal advice before signing, so that you understand your rights and what you are potentially giving up.
If you have any questions about your situation or if you would like to get legal advice, please feel free to contact us.