Ontario’s Court of Appeal looks at language in bonus plans
By Sarah Dobson
The wording of employment contracts continues to pose challenges for employers. Just ask one Ontario firm that was told to pay almost $60,000 in damages.
The Court of Appeal for Ontario case involved Trevor Paquette, who had worked for TeraGo Networks from 2000 until 2014 when his employment was terminated without cause. As both sides were unable to agree on a severance package, Paquette sued for wrongful dismissal.
The motion judge fixed the reasonable notice period at 17 months. But while the judge awarded damages based on the salary and benefits Paquette would have received during the notice period, he rejected the claim for damages for lost bonus payments.
“Paquette may be notionally an employee during the reasonable notice period; however, he will not be an ‘active employee’ and, therefore, he does not qualify,” said judge Paul Perrel.
Paquette appealed. At issue was whether Perrel erred in denying compensation for lost bonuses on the basis the plan required him to be “actively employed” at the time the bonus was paid.
Ontario Court of Appeal judge Katherine van Rensburg found the lower court made a mistake.
Paquette’s entitlement to bonus payments did not depend on whether he was notionally or in fact “actively employed” after his employment was terminated, she said. And Paquette’s claim was not for the bonuses themselves but for common law contract damages as compensation for the income he would have received had TeraGo not breached his employment contract by failing to give notice.
“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,” said Rensburg.
In the end, Paquette was entitled to compensation as part of his damages for wrongful dismissal for the loss of his bonus for 2014 and the lost opportunity to earn a bonus in 2015. Using an averaging approach, this meant additional damages of $58,386.64.
Past issues revisited
This issue came up in the past around stock option plans as companies weren’t really thinking a lot about what happens upon termination of employment, said Douglas MacLeod, principal at MacLeod Law Firm in Toronto.
“The courts interpreted the language to say, ‘As long as the options were granted or vested during the notice period, then that would continue tohappen.’”
So corporations went back and revised the language “so it was very clear the day after you were shown the door, no other options were going to vest or you weren’t going to get any new options. Or they sometimes had clauses where you had to exercise within 30 or 90 days of term, something like that — but at least they dealt with the issue.”
This case is similar, he said.
“The initial drafting, on the face of it, seems pretty clear but the courts are saying now, like they did back then, you need to be really, really, really clear if you’re going to take away somebody’s rights during the common law notice period and this panel of judges didn’t think the existing language was clear enough.”
Just like an employment contract, if an employer wants to restrict an employee’s notice entitlement to something less than her common law entitlement, the contract has to unambiguously state that, said Kyle Lambert, an associate at McMillan in Ottawa.
“The court of appeal is saying the same is the case for bonus entitlement if it’s part of the employee’s standard compensation package.”
The court was very careful in its wording, said Catherine Coulter, a lawyer at Dentons in Ottawa.
“It didn’t send up great big red flags, saying, ‘If you say the following, it won’t suffice,’ but it did leave the door open for better-drafted bonus plans to disentitle employees to bonuses through the notice period. So one can presume from that that if you add other wording to it that makes it clearer, you’ll be fine.”
As to what “more” could be included, that’s the million-dollar question, she said.
“You want to speak about the actual notice of termination date so that bonus entitlements come to an end as of the date of notice of termination or date of notice of resignation. And you probably also want to have some sort of a catchall that says, ‘Notwithstanding any notice period that the employee might be entitled to, that the bonus will come to an end at that earlier date, that earlier notice of termination date.’”
Employers would have to include a termination provision in the employee’s contract that states she is entitled to either x months or x dollars in notice if terminated without cause. And if it’s x dollars, make it a lump sum, for salary only, said Lambert.
“And you want to make sure that without cause notice entitlement is all-inclusive, so ‘Here’s what you get and that encompasses your entire common law entitlement or is in lieu of.’”
But employers have to be careful if they decide to change the wording in bonus plans, particularly if they try to do so for existing employees, he said.
A lot of contracts will just reference an entitlement to bonuses with a bonus plan, said Lambert, so if employers go ahead and change the bonus plan to restricting it to post-termination, and there’s nothing like that in an employee’s existing contract, “then they are unilaterally changing the compensation without changing the contract, and that probably would be considered constructive dismissal.”
Bonus plans are often in separate documents so employers have the flexibility to update performance metrics from year to year, said Coulter.
“For those particular employers, as long as you’ve got clear language in your employment agreement that says you’re going to be subject to a bonus plan, the terms and metrics of which will change from year to year, you’re probably fine to go ahead and change that bonus plan language.”
If an employer has a generic statement in its employment agreement that deals with the bonus plan and people do it catch-as-catch-can from year to year, with no catch-all language, it’s going to be more difficult, she said.
“Then it’s like changing any other employment agreement — you’ve got to give the employee fair consideration in exchange for signing the new agreement during the course of employment and whatever that is, it’s not going to be insignificant in most cases. It’ll be a signing bonus of some sort or a salary increase or a promotion — something along those lines.”