Ont Court of Appeal Clarifies Position on Bonuses After Termination

Written on behalf of Peter McSherry

In Paquette v. TeraGo Networks Inc., the Ontario Court of Appeal recently offered clarification on the issue of bonuses/bonus payments during a reasonable notice period following termination.

The Facts

At the time of his dismissal, Trevor Paquette had worked for TeraGo Networks Inc. in Alberta for approximately 14 years.  He was 49 years old, and had been Director, Billing and Operations Support Services. His compensation had consisted of a base salary and bonuses.

Following his termination, Mr. Paquette brought a summary judgment motion to determine the period of reasonable notice to which he was entitled, damages, and compensation for lost bonuses.

The Original Decision

The motion judge considered all relevant circumstances including: Mr. Paquette’s age, specialized skills, position in upper-middle management, length of his service, and the state of the economy in Alberta. He determined that Mr. Paquette was entitled to a reasonable notice period of 17 months as well as damages based on the salary and benefits he would have received during that period.

The judge rejected Mr. Paquette’s claim for damages for lost bonus payments on the basis that TeraGo’s bonus plan required Mr. Paquette to be “actively employed” at the time the bonus was paid, and he had not been.

The Court of Appeal: Compensation for Lost Bonuses Should Have Been Paid

The Court of Appeal found that the motion judge erred in focusing on the active employment requirement. The “actively employed” clause in TeraGo’s bonus plan did not exclude Mr. Paquette from receiving compensation for lost bonuses as part of his wrongful dismissal damages.

The Court awarded Mr. Paquette compensation for lost bonuses that he should have received during the notice period.

Damages in Wrongful Dismissal

Here, Mr. Paquette’s claim was not for the bonuses themselves, but for damages for compensation (including the bonuses) he would have received had TeraGo not breached the employment contract and failed to provide him with reasonable notice.

The well-established purpose of damages in wrongful dismissal cases is to place the employee in the same financial position they would have been in but for the employer’s breach. In determining a damages award, courts will include all compensation and benefits the employee would have earned during the notice period including bonuses the employee would have received or damages for the lost opportunity to earn a bonus.

The motion judge should have started with the premise that Mr. Paquette’s common law right to damages was based on his complete compensation package, including any bonuses, and then examined whether or not the bonus plan contained any restrictions on that right:

…the proper way to analyze the employee’s claim is to consider first his common law right to damages for breach of contract, and second, whether the terms of the plan alter or remove a common law right.

Very clear language is required in order to limit or remove a terminated employee’s common law rights to damages. Language requiring “active employment” as a prerequisite to receive a bonus or payment is not sufficiently clear.

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.

What does this Mean for Employees?

Prior to this decision, the caselaw on bonus payments in wrongful dismissal cases seemed stacked against employees. Decisions in cases where bonus plan language required that a person be “actively employed” to receive their bonus seemed to create a loophole allowing employers to terminate employees without working notice in order to avoid bonus payments. For instance, here, the employer had argued that Mr. Paquette was not entitled to the bonus because he did not meet the “active employment” requirement in the bonus plan. However, had TeraGo not breached the employment contract by wrongfully dismissing him without notice, he would have been “actively employed” when bonuses were paid, and therefore eligible to receive his bonus.

With Paquette, the Court of Appeal made a clear and important distinction that terminated employees may have the right to common law damages as compensation for loss of a bonus where they were denied the opportunity to receive one because their employer did not provide them with reasonable notice.

Importantly, however, a well-drafted bonus plan could potentially limit an employee’s entitlement to damages for a lost bonus or lost opportunity to earn a bonus during a reasonable notice period. Going forward, there will likely be more litigation surrounding the clauses in such plans, as courts look to further clarify what sort of language is sufficient to limit the common law entitlement to damages for unpaid bonuses. Since language is specific and different with each bonus plan, each individual wrongful dismissal case claiming such damages would be subject to individual and specific scrutiny. The law on bonuses is far from settled, and will continue to develop.

If you have questions about wrongful dismissal and/or damages in wrongful dismissal cases, contact employment lawyer Peter McSherry online or at 519-821-5465.