Active Employment Language Does Not Remove Dismissed Employees’ Entitlement to Bonus

It is common in Ontario for an employer who provides a dismissed employee with pay in lieu of reasonable notice of dismissal to not include payment of any bonuses that the employee would have earned had he or she been given working notice of dismissal. To justify this position, the employer will often point to language in its bonus policy that requires the dismissed employee to be “actively employed” at the time bonus is paid.

However, in Paquette v. TeraGo Networks Inc., 2016 ONCA 618 the Ontario Court of Appeal rejected this argument. The Court found that a term in a bonus policy that requires active employment when the bonus is paid, without more, is not sufficient to deprive an employee terminated without reasonable notice of a claim for compensation for the bonus he or she would have received during the notice period, as part of his or her wrongful dismissal damages.

In reaching this conclusion, the Court began by reviewing the principle that is to be applied by a court when determining damages for wrongful dismissal. At paragraphs 16 to 18 van Rensburg J.A wrote:

The basic principle in awarding damages for wrongful dismissal is that the terminated employee is entitled to compensation for all losses arising from the employer’s breach of contract in failing to give proper notice. The damages award should place the employee in the same financial position he or she would have been in had such notice been given. In other words, in determining damages for wrongful dismissal, the court will typically include all of the compensation and benefits that the employee would have earned during the notice period

Damages for wrongful dismissal may include an amount for a bonus the employee would have received had he continued in his employment during the notice period, or damages for the lost opportunity to earn a bonus. This is generally the case where the bonus is an integral part of the employee’s compensation package. This can be the case even where a bonus is described as “discretionary”.

Where a bonus plan exists, its terms will often be important in determining the bonus component of a wrongful dismissal damages award. The plan may contain eligibility criteria and establish a formula for the calculation of the bonus. And, as here, the plan may contain limitations on or conditions for the payment of the bonus. To the extent that there are limitations, the question may arise as to whether they were brought to the attention of the affected employees, and formed part of their contract of employment. [citations omitted]

van Rensburg J. A., writing at paragraphs 30 and 31, then set out the two-step analysis that is to be applied by a court when deciding whether a dismissed employee is entitled to a bonus:

The first step is to consider the [employee’s] common law rights. In circumstances where, as here, there was a finding that the bonus was an integral part of the terminated employee’s compensation, [the employee] would have been eligible to receive a bonus in February of 2015 and 2016, had he continued to be employed during the 17-month notice period.

The second step is to determine whether there is something in the bonus plan that would specifically remove the [employee’s] common law entitlement. The question is not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the [employee’s] common law rights.

The impact of the Court of Appeal’s decision in TeraGo is far reaching. A significant percentage of the bonus policies in Ontario are no longer effective in preventing dismissed employees who have been provided with pay in lieu of notice from claiming the bonus they would have been paid had working notice of dismissal been provided.