But bad news regarding common law entitlement to bonus payments
By Nadia Zaman and Stuart Rudner
If you are an employer, here’s some good news for you. In Dawe v The Equitable Life Insurance Company of Canada, 2019 ONCA 512, the Ontario Court of Appeal confirmed the “unofficial cap” of 24 months for reasonable notice of termination, absent exceptional circumstances.
However, this decision also bears bad news: If you want to ensure that bonuses are not payable during any period of notice, it is not enough to simply have a bonus plan in place ― it must be communicated to the employee, and providing a copy of the bonus plan may not be enough.
In this case, the employee held the position of senior vice-president with the company and was 62 years old at the time of dismissal. After 37 years of employment, he was terminated without cause following a minor dispute about the purchase and use of promotional sporting event tickets. He sued for wrongful dismissal.
Both parties moved for partial summary judgment on the following issues:
- the proper notice period
- Michael Dawe’s entitlement under the company’s bonus plans.
The employee’s other claims, including claims for punitive and moral damages, were left to be determined at trial.
The motion judge held that 30 months was the appropriate notice period and that Dawe was entitled to bonus payments over this period. In fact, the motions judge “felt this case warranted a minimum 36-month notice period” but could not award it since Dawe only sought 30 months.
The company appealed, arguing that: 1) the motion judge’s determination of reasonable notice was excessive, and 2) the motion judge erred by failing to find that Dawe’s bonus entitlement was limited by a termination provision contained in the company’s bonus plans.
The Ontario Court of Appeal allowed the employer’s appeal on the issue of notice, reducing it to 24 months. In doing so, the court followed the principles laid out in Lowndes v Summit Ford Sales Ltd:
- any determination of a notice period is fact and case-specific
- there is no absolute cap on notice periods, but
- notice periods beyond 24 months must be supported by exceptional circumstances.
Here, the court found that “there were no exceptional circumstances that warranted a longer notice period” and that the motion judge based his decision on “irrelevant” considerations, such as the change in society’s attitude regarding retirement and the fact that Ontario had abolished mandatory retirement. Consideration of the Bardal factors does not constitute “exceptional circumstances.”
The court, however, dismissed the employer’s appeal on the issue of bonus entitlement. First, the court laid out the legal principles for common law entitlement to bonus payments, as stated in Paquette v TeraGo Networks Inc., 2016 ONCA 618:
- “Damages for wrongful dismissal generally include all compensation and benefits that the employee would have earned during the notice period… This amount may include bonus payments that the employee would have been entitled to had they continued to be employed during the notice period.”
- The two-part test is: “(1) was the bonus an integral part of the employee’s compensation package, triggering a common law entitlement to damages in lieu of bonus?; and (2) if so, is there any language in the bonus plan that would specifically remove the employee’s common law entitlement?”
Second, applying the legal principles, the court found that (1) bonus payments were an integral part of Dawe’s compensation package; and (2) the termination provision contained in each of the two bonus plans were not “unclear and confusing,” unlike what the motion judge had concluded.
However, the court agreed with the finding that “the termination provision was unenforceable because it was imposed unilaterally and was not brought to Mr. Dawe’s attention by Equitable Life at any time before his termination.”
Importantly, the court agreed with the motion judge’s conclusions with respect to the importance of bringing negative terms of the bonus plan to the employee’s attention:
“At paras. 46-47, the motion judge found: [the employer] made no effort to bring the forfeiture provisions to Mr. Dawe’s attention. The various memorandums referred to only identify the positive aspects of the bonus plan, in particular the calculation that would result in payment in that particular year… The requirement is communication of the term the employer seeks to rely on. I am not persuaded simply providing a copy of the plan document meets this standard. In essence, providing only a copy of the document transfers the onus to the employee of finding any negative terms of employment. These are complex documents, drafted by lawyers, and most difficult to read and understand. In my view, an employer has a duty to inform the employee of all expected terms of employment. That is particularly the case here as Equitable Life had changed the method of establishing bonus plans and was attempting to introduce a forfeiture clause that was not part of the prior system.”
As an employer, you probably know that if an employee has been dismissed without cause, then the presumption is that they are entitled to reasonable notice at common law, which can be rebutted by a valid and enforceable termination clause in their employment agreement limiting the employee’s entitlement upon termination. However, unlike the minimum statutory entitlements under the Employment Standards Act, 2000, there is no official cap on reasonable notice under common law. This decision provides some relief for employers since it confirms that exceptional circumstances would be needed to go beyond the unofficial cap of 24 months.
This decision is also an important reminder that it is not enough to simply have clear and unambiguous bonus plans if you want to remove the right to bonus payments during a period of notice; they must also be communicated to the employee. What does this communication look like? The Court of Appeal held that providing a copy of a complex bonus plan is not enough. Instead, the employer has a duty to bring to the employee’s attention any negative, unilateral changes made to a bonus plan.
Employers would be wise to ensure that they not only draft clear and unambiguous termination clauses and bonus plans, but that they also ensure that any unilateral changes are brought to the employee’s attention, including the applicable terms.
Nadia Zaman is an associate at Rudner Law in Toronto. She can be reached at [email protected] or (416) 864-8503.