Two decisions released by the Ontario Court of Appeal on August 9, 2016, tackled the difficult issue of bonus payments for terminated employees.  In both decisions, the Court determined that the terminated employee was entitled to bonus payments that would have been paid had the employee continued working during the reasonable notice period.

For employers, the key messages from the two decisions are:

• Employees are presumptively entitled to any bonus payment they would have earned had they continued working through the reasonable notice period.

• In order to rebut that presumption, the employment contract must contain “clear language” that limits the employee’s presumptive entitlement.

• A requirement that the employee be “actively employed” at the time a bonus is paid in order to earn a bonus is, without more, insufficient “to deprive a terminated employee of the bonus he or she would have earned during the period of reasonable notice.”

In Lin v. Ontario Teachers’ Pension Plan Board, Lin was terminated in March 2011 after eight years of employment. The Court determined that he was entitled to 15 months’ notice, meaning his reasonable notice period extended to June 2012. Lin’s compensation included two annual bonus payments; together, the two bonuses comprised approximately 60% of Lin’s income.

The Court determined that the contractual provision that attempted to limit Lin’s entitlement to these bonuses after termination was insufficient. Lin was therefore entitled to both bonuses for 2010 and 2011 (which would have been paid in April 2011 and April 2012 respectively). The Court also determined that Lin was entitled to a pro-rated value of one of the bonuses for the 6-month period from January 2012 to June 2012.  (That bonus was an annual performance-related bonus; the other bonus for which a 6-month pro-rated payment was not ordered a long-term retention related bonus).  In total, the value of Lin’s bonuses post-termination was more than $1,250,000.

In Paquette v. TeraGo Networks Inc., the Court of Appeal overturned the lower court’s decision denying a terminated employee his bonus during the reasonable notice period. The lower court had determined that the bonus plan’s requirement of “active employment” was unambiguous and therefore disentitled the employee to a bonus payment following his termination. The Court of Appeal overturned that decision holding: “a term 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.”

These cases reinforce the importance of drafting properly worded termination provisions that limit employees’ entitlements to bonuses upon termination.  Please contact us if we can be of assistance.