A dismissed employee is entitled to be made whole during his or her reasonable notice period.1 In other words, the employee’s severance or termination package should include all the employee’s compensation and benefits (including any commission, bonuses, stock options, pension contributions and insurance benefits) that the employee would have received had the employee remained actively employed during the notice period.
Employees and employers are entitled to negotiate employment contracts that do not provide for the continuation of benefits or compensation (typically stock options, bonuses and pension contributions) during the reasonable notice period if the employee is dismissed without cause. This type of contractual agreement will rebut the presumption that a dismissed employee is entitled to all compensation and benefits during the reasonable notice period.2
However, any agreement or policy that limits the employee to only certain entitlements during the reasonable notice period must comply with the minimum standards of either the Employment Standards Act (“ESA”) or Canada Labour Code. Typically this is done by agreeing that all of the employee’s compensation and benefits will continue during the minimum notice period required by the ESA. At the end of the statutory notice period certain benefits and compensation will cease, while other compensation (normally the employee’s base salary) will continue to be paid throughout the longer reasonable notice period.
The Entitlement to Bonuses, Stock Options, and Restrictive Stock Units
The employee will be entitled to a bonus, stock option or restrictive stock unit benefit (“variable compensation”) during the employee’s reasonable notice period absent contractual terms to the contrary. To determine the employee’s entitlement to variable compensation the employee’s employment contract should be reviewed as the relevant stock option, restrictive stock unit or bonus plan (“plan”).
The payment of variable compensation during the reasonable notice period will depend on whether the variable compensation was an integral part of the employee’s annual salary and the language of the plan.3
If the variable compensation plan is ambiguous about payment after the employee has been dismissed then the employee will be entitled to the variable compensation if it would have been paid during the reasonable notice period.4
Language in a plan referring to the termination of the employee’s employment will be presumed to be referring to a termination according to law (in other words, the employee will be given working notice of dismissal). The agreement should not be presumed to provide for an unlawful trigger event (such as dismissal without working notice) absent clear language to the contrary.5
For example, the Ontario Court of Appeal in Paquette v. TeraGo Networks Inc.6 found that a term in a bonus policy that required the employee to be actively employed when the bonus is paid, without more, is not sufficient to deprive an employee of a claim for compensation for the bonus he or she would have received during the notice period.
In Lin v. Ontario Teachers’ Pension Plan7 the Court of Appeal held at paragraph 62 that the following language did not unambiguously alter or remove the dismissed employee’s common law right to damages, which include compensation for the bonuses the employee would have received while employed and during the period of reasonable notice:
In the case where a Participant resigns or the Participant’s employment is terminated by [Teachers’] prior to the payout of a bonus (normally the first pay period in April), no bonus shall be earned or payable to the Participant.
In TeraGo the Court of Appeal 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 at paragraphs 30 and 31:
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.
If a plan states that payment of variable compensation is discretionary the employer must use its discretion in a fair and reasonable manner. In Chann v. RBC Dominion Securities Inc.8 Wilton-Siegel J. wrote at para. 50:
The determination of whether the defendant’s representatives established the discretionary cash bonus in a fair and reasonable manner involves an examination of the process adopted by the defendant’s representatives and of the factors taken into consideration. The plaintiff is entitled to a process which ensures that the determination is made with adequate information regarding his relative contribution to the defendant’s financial performance. It is also incumbent upon the decision-maker to consider only factors which are reasonably related to the firm’s performance and, as far as is practicable, to apply those factors consistently among employees and from year to year. I agree with the defendant, however, that if the defendant satisfies this test, the Court should not interfere with the exercise of this discretion by substituting a different award applying the same factors.
Whether it is reasonable for an employer to take into consideration the fact that an employee’s employment has been terminated when deciding whether to pay the employee discretionary variable compensation will depend entirely on the term of the employment agreement between the parties.9
Compensation for Lost Pension Benefits
An employer’s failure to continue to contribute to a dismissed employee’s pension during the notice period may impact the employee’s future pension entitlements. An actuary is typically retained to calculate the net present value of the damages suffered by the employee.
When awarding damages, the court will be willing to take into account the additional tax liability the plaintiff will suffer as a result of taking all of the funds at once. This is done by “grossing up” the award to take into account the tax liability. The Ontario Court of Appeal recognized this approach in Dowling v. Ontario (Workplace Safety and Insurance Board)10 writing at para. 77:
The trial judge was alive to the jurisprudence of this court expressing doubt about the propriety of grossing-up pension awards. However, after referring to the relevant passages in Peet v. Babcock & Wilcox Industries Ltd. (2001), 53 O.R. (3d) 321 (Ont. C.A.), he rejected the notion that the disputed sum was a “gross-up”. He recognized the adverse tax consequences that would result from Mr. Dowling’s receipt of the damage award as a lump sum and, in my view, correctly included a “gross-up” to offset the additional tax liability occasioned by receipt of the funds all at once, as opposed to over time. To fail to take into account the adverse tax consequences occasioned by a change in the timing of their receipt would be to restrict a person from realizing the full benefit of the damages awarded in a wrongful dismissal case.
The Risk of Failing To Continue An Employee’s Disability Benefits After Dismissal
Many employers are unaware that because a dismissed employee is entitled to be made whole during the reasonable notice period the employer risks becoming the dismissed employee’s de facto insurance provider if the employer unilaterally cancels the dismissed employee’s insurance benefits without the employee’s consent during the employee’s reasonable notice period. In other words, the fact that an employer may have terminated the dismissed employees insurance benefits does not necessarily eliminate the employee’s legal entitlement to those benefits. The employer may find itself legally responsible for paying the employee short-term or long-term disability benefits or the employee’s estate life insurance benefits if the employer discontinues these benefits during the notice period. This was confirmed in Alcatel Canada Inc. v. Egan11 in which the Ontario Court of Appeal held at paragraph 26:
Where an employee would otherwise have qualified for disability benefits during the reasonable notice period, but the application is denied on the basis that coverage was wrongfully discontinued by the employer, the employer must be liable for the value of the disability benefits that would otherwise have been payable.
More recently in Fernandes v. Peel Educational12 a dismissed teacher was found by the Court to be disabled and no longer able to work. The teacher was he was no longer eligible for his employer’s long-term disability plan after his dismissal. As a result, the Court ordered the employer to pay the capitalized value of the employee’s monthly disability benefits to the date he turned 65.
An example of the potential costs an employer may incur as a result of not continuing a dismissed employee’s benefits is highlighted in Brito v. Canac Kitchens13 Justice Echlin considered the dismissal of the plaintiff, Mr. Luis Romero Olguin, who had been dismissed without cause in July 2003 at the age of 55. The plaintiff had nearly 24 years of service and was a team leader earning approximately $71,000.00. At the time of his dismissal, Canac paid the plaintiff the statutory minimum payment representing 31.79 weeks’ notice and severance pursuant to its obligations under the ESA. It also continued the plaintiff’s benefits for the mandated minimum period of eight weeks as required by the ESA.
The plaintiff mitigated a portion of his damages shortly after his dismissal when he started new employment on August 1, 2003 at a much lower rate of compensation. In the 15 months following his re-employment, he earned $53,074.14. His new employer, however, did not provide benefits.
In November 2004, the plaintiff underwent surgery for laryngeal cancer. He had several subsequent surgeries. Justice Echlin reviewed the medical evidence and found that, as a result of the plaintiff’s medical condition, he was totally disabled and would not be able to re-enter the work before he reached the age of 65, the date his entitlement to long-term disability (“LTD”) benefits ended.
Justice Echlin found that the plaintiff was entitled to 22-month reasonable notice of his dismissal. He then turned to the question of how to deal with the plaintiff’s entitlements between the date the plaintiff became disabled to the end of the plaintiff’s 22 month notice period. Justice Echlin wrote:
How should the law deal with the events of the period of November 6, 2004 [the disability date] to May 15, 2005 [the end of the 22 month notice period]? If it is to place Mr. Luis Romero Olguin into the position he would have been in had Canac provided him with working notice, he would have received his regular cash employment compensation, plus all benefit coverages for the entirety of his 22 month notice period at law.
Canac consciously chose not to make alternative arrangements to provide its loyal, long-service employee with replacement disability coverage. Rather, it chose to go the “bare minimum” route. It provided only the statutory minimums in pay and benefits and then gambled that he would get another job and stay well. When it lost that gamble, it chose to litigate this matter for over five years. When confronted with its potential significant exposure, it raised the argument that [the plaintiff] failed to mitigate his potential damages by purchasing a replacement disability policy.
I reject that argument. The onus is upon Canac to establish the plaintiff’s failure to mitigate. Canac has failed to do so in this instance. Insufficient evidence was led to show that comparable coverage would have been available and would have provided Mr. Luis Romero Olguin with comparable coverage. While Mr. McKechnie conceded that in this setting, the law transforms the employee into a “notional employee”, he argued that Mr. Luis Romero Olguin failed to satisfy the “actively at work” requirement contained in the policy wording. I reject this argument and find it to be circular logic to argue that, if the Plaintiff was to be deemed a “notional employee”, then how can it be asserted that he was “not actively at work”?
Canac was ordered to pay damages to the plaintiff for its failure to pay the plaintiff his compensation throughout the 22 month reasonable notice period. In addition, the plaintiff was awarded the net present value of the outstanding LTD payments up to the date the plaintiff turned 65. Because the plaintiff had contributed to his benefit plan, Justice Echlin, relying on the Supreme Court of Canada’s decision in Sylvester v. British Columbia14 held that the plaintiff’s LTD damages were not offset by his salary payments. In short, the plaintiff was awarded damages of approximately $250,000. However, only $40,000 of the total award represented damages for Canac’s failure to pay the plaintiff his wages during his 22 month reasonable notice period.
Justice Echlin’s decision as it relates to the award of damages for Canac’s failure to continue the plaintiff’s LTD benefits was upheld by the Ontario Court of Appeal.
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- Brito v. Canac Kitchens, 2011 ONSC 1011; 2012 ONCA 61;
- Arnone v. Best Theratronics Ltd., 2015 ONCA 63 at paras 30 to 32;
- Kieran v. Ingram Micro Inc., 2004 CanLII 4852 (ONCA) at para. 56; Paquette v TeraGo Networks Inc., 2015 ONSC 4189 (CanLII) at 40;
- Kieran v. Ingram Micro Inc., 2004 CanLII 4852 (ON CA) at paras. 56 -61;
- Veer v. Dover Corporation (Canada), 1999 CanLII 3008 (ONCA) at para. 14;
- Paquette v. TeraGo Networks Inc., 2016 ONCA 618;
- Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619;
- Chann v. RBC Dominion Securities Inc., 2004 CanLII 66310 (ON SC);
- Chann v. RBC Dominion Securities Inc., 2004 CanLII 66310 (ON SC) at para. 71;
- Dowling v. Ontario (Workplace Safety and Insurance Board), 2004 CanLII 43692;
- Alcatel Canada Inc. v. Egan, 2006 CanLII 108 (ONCA) at para. 26;
- Fernandes v. Peel Educational, 2014 ONSC 6506;
- Brito v. Canac Kitchens, 2011 ONSC 1011; 2012 ONCA 61;
- Sylvester v British Columbia 1997 CanLII 353 (SCC);