Are employees entitled to bonus payments after their employment ends?
A look at 2 different cases with 2 different results
Oct 20, 2015
By Stuart Rudner
This is often a contentious issue that our firm has to address, whether we are acting for the employer or the employee. And as always, the answer is “It depends.”
By default, pay in lieu of notice of dismissal is intended to include all forms of compensation, and not just base salary and some benefits as employers occasionally offer. This should include bonuses, commissions, health-related benefits, disability coverage, car allowance, and any other form of compensation the employee would have received if she had continued to work during the relevant period of notice.
To be clear, this is the common-law period of reasonable notice, and not just the statutory period that would apply. As the Superior Court of Justice on Ontario recently wrote:
“Damages in lieu of reasonable notice are intended to put an employee in the same position that he would have been in had he worked to the end of the period of reasonable notice. This is trite law. However it is also clear law that the parties may bargain for terms that are different from what the common law provides."
According to common law, all forms of compensation are to continue during the notice period. This default is subject to modification through an enforceable contract or policy, but the onus will be on the party seeking to prove such an exception to show there is clear documentation supporting it.
In many cases, employers will present offers of employment that provide for bonuses but place limitations on eligibility if the individual is no longer employed when those bonuses would be paid out. This often becomes a contentious issue, particularly where the bonus is a significant portion of the individual's compensation package.
Two recent court decisions assessing this issue came to different conclusions. The first, Kielb v National Money Mart Company, 2015, involved a lawyer as the plaintiff employee. The evidence was that there had been extensive negotiation of his contract of employment, and his bonus was to be a significant portion of his compensation.
Ultimately, he signed an agreement which contained the following clause (with emphasis added):
“KEY MANAGEMENT BONUS and LONG TERM INCENTIVE PLAN
Bonus: Annual bonus earnings of up to 30 per cent of your annual base salary each fiscal, based upon the attainment of annual company and Dollar Financial Corp (DFC) profitability targets. It is possible that your said 30 per cent bonus earnings may increase up to an additional of 30 per cent of your annual base salary if the company and DFC exceed their profitability targets as outlined in the company’s management bonus program. All annual bonus amounts will be prorated based on your months of employment for the first fiscal year. The company is on a fiscal year ending June 30. The company may amend the terms of the bonus plan from year to year. Your business unit designation for the fiscal year 2009 will be “Canadian Retail”. Any bonus which may be paid is entirely at the discretion of the company, does not accrue, and is only earned and payable on the date that it is provided to you by the company. For example, if your employment is terminated, with or without cause, on the day before the day on which a bonus would otherwise have been paid, you hereby waive any claim to that bonus or any portion thereof. In the event that your employment is terminated without cause, and a bonus would ordinarily be paid after the expiration of the statutory notice period, you hereby waive any claim to that bonus or any portion thereof. You also hereby waive any claim to constructive dismissal based on the fact that a bonus is not paid, is less than was previously paid, or is less than is paid to another employee.”
The plaintiff was dismissed and sought payment of the bonus which he claimed to be entitled to. The court in that case summarized the facts as follows: “allegations of broken promises, ambiguous clauses and inequitable treatment and, at its heart, a contract that was both enticing in its promises and cruel in its execution.”
In siding with the employer, the court made the following comments, which are instructive:
“He was lured, no doubt, by the handsome compensation — potentially his base salary plus 60 per cent — that he readily believed would be forthcoming. His choice was to live with the less favourable clauses in his contract and the risks that they entailed...”
“It may well have been that some of the provisions, particularly the “full and final release” clause in the termination provision, could be viewed as harsh. However, harshness of the provision does not make it invalid if both parties have agreed to it: Jivraj v. Strategic Maintenance Ltd…”
“Public policy would be ill-served by permitting the plaintiff to accept a potentially lucrative position with the full knowledge that it contained a potentially unfavourable limitation clause and then to complain when that clause was actually executed…”
“Regrettably for the plaintiff, I find the clause to be unambiguous in its restrictive nature. The clause is to be read in its entirety and, in my view, makes clear that if the plaintiff’s notice period fell within the bonus payment period, it would be honoured. Any doubts about the ambiguity argument are resolved by the plaintiff himself; he clearly understood what it meant. He testified to his surprise and dismay at the language in the clause and the manner in which it favoured Money Mart. According to him, the clause was harsh and contained ‘bully language.’”
As a result, the court found no reason to stray from the clear wording of the contract and award the bonus to the plaintiff.
Conversely, the recent decision in Lin v OTPPB, 2015, provides hope to employees that they will receive their bonus payment even if they are terminated before it is paid. In that case, the evidence was that bonuses at the Ontario Teachers’ Pension Plan Board were typically paid in April of the year following the year in which they were earned. Like the Kielb case, David Der Lin’s bonus comprised a substantial portion of his compensation package. Lin was dismissed and at trial, the judge found he was entitled to a notice period of 15 months.
The plaintiff received two forms of bonuses: an AIP (a short-term incentive plan) and LTIP (long-term incentive plan). The employer took the position he was not eligible for any bonuses paid out after his employment had been terminated.
In considering the issue, the court referenced the Ontario Court of Appeal decision in the 1997 Schumacher v. Toronto Dominion Bank, which held that:
“Where the bonus was promoted as an integral part of the employee’s cash compensation, it would be inappropriate and unfair to the employee to be deprived of the bonus by reason of the unilateral action of the employer. I do not agree with the position taken by the bank on this third issue. Schumatcher remains entitled to consideration of a bonus, both for the period he worked and the notice period.”
According to the court in Lin:
“The AIP is a significant, non-discretionary variable form of compensation, integral to Lin’s compensation. He is entitled to this compensation for the time he worked at Teachers’ and for his period of reasonable notice.”
By way of contrast, the LTIP was found by the court to have a different purpose:
“The long-term incentive program operates as compensation to induce employees to remain in their employment with Teachers’. Each year an amount may be awarded to the employee’s LTIP account. The account earns income on its balance at Teachers’ annual return on investment for assets under management. 25% of the accrued balance of the account is paid out to the employee annually, in April…”
“If Lin had been given 15 months’ notice, his LTIP account would have been awarded funds annually, with payouts to him for prior years’ awards in April of each year. The payout in 2011 was approved by the board at $255,400 at the March 4, 2011, board meeting. I find that Lin is entitled to payment of this amount for LTIP as of April 2011…”
“Lin would also have been entitled to an LTIP payment in April 2012 if he had been given 15 months’ notice. I fix the amount of this payment at $255,400. No alternative figure was proposed or proved.”
“Lin did not claim the balance of his LTIP account that would have been accrued and unpaid at the end of his reasonable notice period. This position is correct. 25 per cent of the LTIP account is paid out annually, leaving 75 per cent retained as an incentive to the employee to remain with Teachers’. The purpose of the LTIP would be defeated if the 75 per cent balance of the fund was paid out upon termination. However, it is not inconsistent with the purpose of the fund for LTIP accruals to continue, and be paid out on payment dates, during the period of reasonable notice (emphasis added).”
So, in this case, the plaintiff received his accrued AIP and compensation for the loss of the AIP during the notice period. He received his accrued LTIP but not LTIP that would have been accrued but not yet paid when the notice period ended. Two different cases, two different results.
Employers should bear in mind that if there is nothing that states otherwise, employees are entitled to bonus payments during the period of reasonable notice. Furthermore, even if there is a contract or policy which says otherwise, it may not be enforced, particularly where the result is unduly oppressive.
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Stuart Rudner is a founding partner of Rudner MacDonald LLP in Toronto. Follow him on Twitter @CanadianHRLaw
. He can be reached at email@example.com