Active Employment and Employee Bonus Entitlements
Many Ontario employees receive some form of bonus payment as part of their total compensation. In a recent decision from the Ontario Court of Appeal, Paquette v. TeraGo Networks Inc., the Court provided clarity around the circumstances in which an employee will be entitled to receive bonus payments as part of their severance during the applicable notice period.
Prior to Paquette there was some confusion around the circumstances in which Ontario workers are entitled to receive bonus payments following termination. In the instant case, Mr. Paquette was employed by TeraGo for close to 14 years prior to his wrongful dismissal in November 2014. Mr. Paquette brought a motion for summary judgment seeking reasonable notice and compensation for lost bonus payments. The Motion Judge awarded Mr. Paquette 17 months’ salary and benefits, but refused to award an amount for loss of bonus payments during the reasonable notice period.
In reaching this decision, the Motion Judge reviewed the terms of the employer’s Bonus Program, which provided that in order to be eligible for receipt of a bonus, an employee must be “actively employed by TeraGo on the date of the bonus payout.” The Bonus Program was composed of two constituent parts: the employee meeting his/her targets and the Company satisfying pre-set corporate objectives.
Based on the fact that Mr. Paquette would not have been “actively employed” when the bonus became payable, the Motion Judge declined to confirm Mr. Paquette’s eligibility for the same.
The Motion Judge stated:
I conclude that Mr. Paquette is not entitled to any bonus payments. Although the Bonus Program at TeraGo was an integral part of Mr. Paquette’s employment, there is no ambiguity in the contract terms of the Bonus Program. Mr. 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 for a bonus.
On appeal, the Court overturned this decision, opining that the Motion Judge had erred in principle and his decision was not entitled to deference. The Court of Appeal awarded bonus payments to Mr. Paquette, and in so doing confirmed that the basic principle in awarding damages for wrongful dismissal is that “the employee is entitled to compensation for all losses arising from the employer’s breach of contract in failing to give proper notice.” Such that, that “damages award should place the employee in the same financial position he or she would have been in had such notice been given.” (para 16)
In addition, the Court found that where there is a written bonus plan in place, it will likely be necessary to consider its eligibility criteria, whether these criteria were brought to the attention of the employee, and whether the bonus plan forms part of the employment agreement.
Ultimately, the Court confirmed as the correct approach to bonus entitlement the approach set out in Taggart v. Canada Life Assurance Co:
Assuming that the pension plans can be read as requiring active service as a prerequisite for the accrual of pension benefits, I find unpersuasive the argument that this precludes damages as compensation for lost pension benefits. This argument, it seems to me, ignores the legal nature of the respondent’s claim. The claim is not … for the [benefits] themselves. Rather, it is for common law contract damages as compensation for the [benefits] the [employee] would have earned had the [employer] not breached the contract of employment. The [employee] had the contractual right to work and to be paid his salary and receive benefits throughout the entire … notice period. (para 22)
Therefore, a proper assessment of an employee’s entitlement to receipt of bonus payments must consider:
- The employee’s common law right to compensation for the duration of the reasonable notice period. If a bonus is found to form an integral part of this compensation, then compensation in lieu of the bonus payment is de facto owing to the employee for the duration of the specified reasonable notice period;
- If there is a written bonus plan in place, whether there is any express language in the plan which has the effect of ousting the employee’s common law entitlement.
Takeaway for Employees
If you receive a recurring bonus payment as part of your total compensation, you will likely be entitled to receive this payment over the duration of your applicable reasonable notice period. As such, if you are dismissed, speak with an employment lawyer to ensure you receive fair severance.
Takeaway for Employers
In light of Paquette, many employer bonus plans, specifically those that tie receipt to “active employment” may now no longer stand up to judicial scrutiny. Accordingly, be sure to go back and look at your organization’s contracts and policies. If the term “active employment” is utilized, speak with an employment lawyer to avoid unwanted and unexpected liability.
Vey Willetts LLP is an Ottawa-based employment and labour law firm that provides timely and effective legal advice to employers and employees in the Capital Region and across Ontario. To speak with an Ottawa employment lawyer, please contact: info@vwlawyers.ca or 613-238-4430.
