What types of bonuses would and wouldn't be considered part of termination pay in lieu of notice?
Question: What types of bonuses would and wouldn’t be considered part of termination pay in lieu of notice of dismissal?
Answer: When an employee is terminated, the presumption is that they will be provided with working notice of termination. This is referred to as the reasonable notice period, the length of which is determined through statute and common law. More often than not, an employer will pay the monetary equivalent in lieu of having the employee work through the reasonable notice period. However, the employee is entitled to anything they would have earned during the notice period, regardless of whether the employee works through it or is paid in lieu of working it.
Just recently, the Supreme Court of Canada (SCC) considered whether a terminated employee is entitled to bonuses during their reasonable notice period in Matthews v. Ocean Nutrition Canada Ltd. The SCC held in the affirmative, unequivocally stating that an employee is entitled to compensation for bonuses that they would have otherwise received during the reasonable notice period. The SCC awarded more than $1 million to a terminated senior executive for the loss of a long-term incentive plan (LTIP) payment that would have accrued during his notice period, which a lower court had determined to be 15 months. The LTIP payment resulted from the sale of the company 13 months into the employee’s 15-month notice period, which constituted the “realization event” necessary under the LTIP payment terms for the employee to receive payment.
The SCC outlined a two-part test that will be helpful to employers in determining what bonuses should be included when terminating an employee. First, would the employee have been entitled to the bonus or benefit as part of their compensation during the notice period? Second, if so, are there any terms of the employment contract or bonus plan that unambiguously remove or limit the employee’s entitlement?
In response to this recent SCC decision, employers should be mindful of the following:
- Ensure language excluding an entitlement that may become owing during a reasonable notice period is clear and unambiguous and that it complies with the applicable provincial employment standards legislation.
Employers should take this opportunity to review the language of any bonus, incentive or stock plans their employees take part in and determine the strength of the exclusionary language in these plans and if it complies with the minimum employment standards legislation.
- Inform employees of exclusionary language. Employers should also ensure that the provisions limiting bonus or benefit payments during the reasonable notice period are brought to the attention of employees when they begin their employment or, given this recent SCC decision, reviewed with all employees in the near future.
For more information, see:
- Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 (S.C.C.).
Tim Mitchell practises management-side labour and employment law at McLennan Ross in Calgary. He can be reached at (403) 303-1791 or [email protected]
