Bonus entitlement after dismissal

Good faith and a clear contract can clear up confusion over bonuses for dismissed employees

Question: Can an employer stipulate that employees are only entitled to bonuses if they’re employed at the time the bonus is awarded, even if the bonus is based on the results of the previous year before the employee was dismissed?

Answer: The Supreme Court of Canada has recognized that a duty of good faith applies to contractual dealings (see the 2014 decision in Bhasin v. Hrynew). The parties to contractual negotiations must act in good faith throughout the process, and this dealing has recently impacted the way Canadian Courts view bonus entitlements after an employee has been terminated.

Many employers have bonus agreements which state that an employee must be employed at the time the bonus is awarded to be eligible for the bonus (even if the bonus is based on the previous year’s results). If an employee resigns or is dismissed before the bonus is paid out, then the employer takes the position that no bonus is owing.

Whether such a bonus policy will be binding after termination is largely an unsettled area of the law. Courts in varying jurisdictions have interpreted the situation differently. Two recent cases from Ontario and Alberta show the different perspectives a court may take.

In Paquette v. TeraGo Networks Inc., the Ontario Superior Court determined that a 14 year employee who was terminated without cause was not eligible for a bonus even though the bonus became payable during the reasonable notice period. In this case, the employee was 49 years old when he was dismissed from the company. The employer’s bonus policy stated that employees were eligible for bonuses if they were “actively employed by TeraGo on the date of the bonus payout.” The court outlined the case law on the issue of bonuses after termination and determined an employee is entitled to a bonus that becomes payable during the reasonable notice period if the contract provisions are silent on the bonus eligibility or if the provisions are ambiguous. However, because the TeraGo bonus policy was not ambiguous — it clearly stated that an employee must be employed at the time the bonus was paid to be eligible for the bonus — the dismissed employee was not eligible for it, even though it became payable during his reasonable notice period.

The Alberta Court of Queen’s Bench demonstrated a different perspective in Styles v. Alberta Investment Management Corp. In this case, the court focused on the interpretation of the agreement surrounding the company’s long-term incentive plan, which vested grants to employees four years after they were provided. An employee had to be employed at the time the grants vested to receive them. Notably in this case there were also annual incentive plans that provided bonuses on a yearly basis. The court determined that the dismissed employee was eligible for the payout of his long-term incentive plan as it would have vested during his period of reasonable notice. The court did note that the wording of the various provisions surrounding the policy over the years were not as clear as they should have been. It relied on the principles in Bhasin to correct the power imbalance between the two parties and determined that it was unfair for the employer to take away the four-year vested grant from the plaintiff when it would have been properly payable during the notice period.

These two cases demonstrate disparate interpretations of what constitutes good faith dealing under a contract. However, while a duty of good faith exists and honest contractual dealings are required, this does not take away the will of the parties to craft a deal that is more beneficial to them than the other party. What these two cases suggest is that the wording in bonus agreements is very important to determining whether they are required to be paid out if they become payable during the reasonable notice period. Employers should strive for clear and unambiguous provisions in bonus agreements if an employee will only be eligible for a bonus if he is actively working at the time of the payout. If the provision is ambiguous or perceived as unfair, a court will generally award the bonus to the dismissed employee if it becomes payable during the notice period.

Meghan McCreary is a partner practicing labour and employment law with MacPherson Leslie & Tyerman LLP in Regina. She can be reached at (306) 347-8463 or [email protected]

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