Discretionary bonus conditional on signing of termination agreement

Can an employer require a dismissed employee to sign the termination agreement/waiver before providing the bonus?

Brian Johnston

Question: If a dismissed employee’s bonus is part of the employment contract but it’s stipulated the amount of the bonus is discretionary based on a number of factors, can the employer require the employee to sign a termination agreement/waiver before providing the bonus?

Answer: The answer is yes, an employer can require an employee to sign a termination/waiver before providing the bonus. There is nothing illegal or wrong about that.

However, such an approach begs the question as to whether the employer would be otherwise liable for the bonus if the employee does not sign the termination agreement or waiver.

Bonus entitlements have been the subject of much litigation.

Courts of Appeal in Nova Scotia, Alberta, and Ontario have taken a strict approach to any language that an employer claims excludes bonus entitlement during a reasonable notice period. In considering the issue, the Court of Appeal for Ontario in Paquette v. TeraGo Networks Inc. articulated a two-part test:

• Is the bonus or incentive plan an integral part of the employee’s compensation package, triggering a common law entitlement to damages in lieu of bonus?

• If so, is there any language in the plan that would restrict the employee’s right to recover the compensation through the notice period?  The question is not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the appellant’s common law rights.

Recent decisions in Alberta and Nova Scotia have stressed that the intention of the parties, as evidenced through the plain and ordinary meaning of the language of the relevant incentive plans, should govern.

In Styles v. Alberta Investment Management Corp., the Court of Appeal of Alberta held that if there are preconditions to receiving a bonus payout and those conditions are not met, the failure to pay the bonus cannot be described in any sense as being “dishonest.”

Similarly, in Ocean Nutrition Canada Ltd. v. Mathews, the Nova Scotia Court of Appeal held that the issue was not whether the employer was seeking to limit the employee’s common law rights, but whether the employee qualified for the bonus pursuant to the terms of the agreement.

Terms such as “employed,” “in good standing” and “active employment,” without further explanation, will be insufficient to limit an employee’s entitlement to a bonus. To provide certainty, the employment contract should contain a clause that explicitly limits an employee’s right to recover the bonus during a common law notice period.

The language should include more than just a mere reference to the requirement that the employee be “actively employed.”

 In both Styles and Ocean Nutrition, the relevant language in the contract provided additional definitions and context, including, as was the case in Styles, language that referenced the bonus being forfeited “without regard to whether the participant is receiving, or will receive, any compensatory payment or salary in lieu of notice of termination.”

Without specific contractual provisions limiting the right of employees to the bonus, the employee has no obligation to sign the termination agreement/waiver.

Nonetheless, the employee may sign the waiver voluntarily if appropriate consideration is provided.

For more information, see:

Paquette v. TeraGo Networks Inc., 2016 CarswellOnt 12633 (Ont. C.A.).

Styles v. Alberta Investment Management Corp., 2017 CarswellAlta 1 (Alta. C.A.).

Ocean Nutrition Canada Ltd. v. Mathews, 2018 CarswellNS 393 (N.S. C.A.).

Brian Johnston is a partner at Stewart McKelvey in Halifax. He can be reached at (902) 420-3374 or bjohnston@stewartmckelvey.com.

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