Bonuses and other forms of incentive compensation often form a significant part of employees’ compensation.  Upon termination, an issue that often arises in determining an employee’s legal entitlements is whether a bonus payment is included or not in a severance package. Under common law, an employee is entitled to all compensation that he or she would have earned during the reasonable notice period. If the employee would have earned a bonus payment during the reasonable notice period, then he or she is entitled to the bonus as part of his or her severance package.

However, many employers have written bonus plans or policies that contain certain terms regarding an employee’s entitlement to a bonus, including upon termination.  In particular, in an attempt to limit liability upon termination, many of these bonus plans or policies contain language stating that an employee must be “actively employed” upon the date of payout in order to receive a bonus payment.  A recent decision of the Ontario Court of Appeal, Paquette v. TeraGo Networks Inc., 2016 ONCA 618 (CanLII), has confirmed that such language by itself is not sufficient to deprive an employee, who is terminated without cause, of compensation for a bonus in appropriate circumstances.

Case Study

Facts

Mr. Paquette worked for TeraGo for 14 years and held the position of Director, Billing and Operation Support Services at the time his employment was terminated without cause. Mr. Paquette participated in the bonus program and received bonuses in each of the 4 years prior to his termination. Mr. Paquette proceeded to sue TeraGo for wrongful dismissal, claiming the value of his salary, bonuses and benefits that he would have received for the duration of his reasonable notice period.

At trial, Mr. Paquette was awarded damages in lieu of 17 months’ notice, taking into account his salary and benefits only. The trial court excluded the bonuses which he would have earned during his notice period on the basis of its interpretation of TeraGo’s bonus program. The program required employees to be “actively employed by TeraGo on the date of the bonus payout” in order to receive a bonus payment. The trial court reasoned that, while Mr. Paquette was a notional employee during the reasonable notice period, he was not an “active employee” and therefore he was ineligible for the bonuses that would have been paid during the notice period.

Decision

Mr. Paquette appealed the trial court’s decision and the Ontario Court of Appeal found in favour of Mr. Paquette, ruling that the language contained in the bonus program did not preclude him from claiming compensation for the lost opportunity to “work out the notice period” and thus receive his bonus payments. The Court clarified that Mr. Paquette’s claim was “not for the bonuses themselves, but rather for common law contract damages as compensation for the [bonuses] he would have received had TeraGo not breached his employment contract by failing to give reasonable notice of termination”.

Conclusion

This case highlights the importance for employees, upon termination, to seek legal advice from an employment lawyer regarding their severance entitlements, including whether a bonus payment should be part of his or her severance package.  For employers, this case reiterates the importance of having their bonus plans reviewed by an employment lawyer.  In particular, in light of the findings of the Ontario Court of Appeal in Paquette, bonus plans need to have clearly worded bonus plans that limit their liability to pay employees a bonus payment during the reasonable notice period. It is clear that using the “actively employed” provision in bonus plans is no longer sufficient to limit such liability. It is also recommended that employers use employment agreements with new employees that uses clear language on what damages the employee is entitled to upon termination.