Ontario Court Awards Discretionary Bonus to Terminated Employee As Integral Part of Compensation

Written on behalf of Peter McSherry

We have previously written about a 2020 Supreme Court of Canada decision in which the Court decided that a constructively dismissed employee was entitled to a $1.1 million bonus under his employer’s incentive plan.

In a more recent Ontario decision, the court held that an employee was entitled to a bonus following termination, despite the employer’s argument that its award was discretionary in nature.

Employee Terminated During Restructuring

The employee worked for the employer as a Senior Vice-President from May 2014 until February 2018, when he was terminated without cause during a corporate restructuring. 

His employment contract’s termination clause stated: 

“This contract of employment is terminable, without reasons, by either party without giving any notice during probationary period and one month notice on confirmation. The Company reserves the right to pay or recover salary in lieu of notice period. Further, the Company may at its discretion relieve you from such date as it may deem fit even prior to the expiry of the notice period.”

The employer thus paid the employee one month’s pay in lieu of notice as provided for by the contract. 

However, the employee claimed that the termination clause in his contract was invalid because it contracted out of the minimum employment standards established in the Canada Labour Code (the “CLC”). The CLC applies to any federal work, undertaking or business, including inland or maritime shipping and navigation companies. 

The employee argued that he was entitled to reasonable notice at common law and should be given eight months pay in lieu of notice. Further, he submitted that he was entitled to damages representing the benefits he would have earned during the common law notice period. Finally, the employee argued he was entitled to the bonus for 2017 as well as damages for the bonus he would have earned for the period he worked in 2018 and during the notice period. The employee had received a significant bonus in 2014, 2015 and 2016, though he had not received a bonus for 2017 or for the time he worked in 2018. He argued that his bonus was an integral part of his compensation even though it was discretionary.

In response, the employer claimed that the termination clause was enforceable because the employee had received more under his contract than he would have been entitled to under the CLC. If the termination clause was deemed unenforceable, the employer argued that the employee was only entitled to four or five months pay in lieu of notice at common law. Finally, it submitted that the employee was not entitled to any bonus payment because the bonus was entirely within its discretion and was not an integral part of the employee’s compensation. The employer argued that while the employee had been eligible for a bonus, he was never entitled to a bonus and, as a result, he should not be paid any bonus upon termination.

Court Awards Bonus to Employee

In order to assess whether the termination clause was valid, the court first set out to determine whether it would have afforded him less than the minimum termination and severance pay required under the CLC . While the employment contract afforded the employee one month’s pay on termination (or approximately 20 working days pay), the court noted that, after seven years of employment, the employee would have been entitled to a total of 24 days pay under the CLC – two weeks (10 days) notice plus 14 days of severance pay. As a result, the court found that the termination clause had the potential of violating the minimum standard in the CLC for termination and severance pay and the clause was therefore unenforceable. Further, the court held that the employee’s employment contract did not displace the presumption that he was entitled to reasonable notice at common law.

After reviewing the applicable considerations in determining the length of the employee’s reasonable notice at common law, the court found that having regard to the nature of the employee’s positions, his age, the length of his tenure and the difficulties he had finding comparable employment, the employee was entitled to eight months reasonable notice. 

Turning to the question of the employee’s bonus, the court explained that, as a general rule, damages for wrongful dismissal should put terminated employees in the same financial position they would have been in had reasonable notice been given, which will typically include all of the compensation and benefits the employee would have earned during the notice period. The court then stated:

“Damages for wrongful dismissal might also include payment in lieu of a bonus the employee would have received during the notice period if the bonus was an integral part of the employee’s compensation, even if it was at the discretion of the employer.”

Therefore, it was up to the court to first determine whether the employee’s bonus had been an integral part of his compensation and, if so, whether he had a common law entitlement to the bonus he earned or would have earned up to the end of the notice period. Secondly, the court had to determine whether the employment contract or bonus policy unambiguously took away or limited the employee’s entitlement to a bonus.

After reviewing the employment contract and bonus policy, the court held that the employee’s bonus was a significant and consistent part of his total compensation. As such, it was an integral part of his compensation and he had a common law right to the bonus he earned in 2017 and to the bonus he would have earned to the end of the notice period in 2018.

Secondly, the court determined that there was no language in the contract to suggest that the employer was not required to pay a bonus that had been earned before the employee was terminated and there was no language to suggest that a terminated employee was not entitled to compensation in lieu of a pro rata share of a bonus during the notice provision. The court therefore held that the employee was entitled to a bonus for 2017 as well as a bonus for the time he worked in 2018 and during the notice period in 2018.

While the employer had not presented evidence as to how the bonuses were calculated, the court held that, in the absence of specific information about the calculation of bonuses, it was appropriate to average the bonuses paid in the preceding three years. As a result, the court determined that the employee was entitled to a bonus in the amount of $33,333 USD for 2017, and a pro-rated bonus for the time he worked in 2018 and during the notice period based on an annual bonus of $33,333 USD.

In the result, the court held that the termination clause was not enforceable and the employee was entitled to eight months common law notice. Further, it held that the employee was entitled to the bonus he would have earned in 2017 and 2018 as well as damages in lieu of benefits he would have received during the notice period.

Get Help

Employees concerned that their termination clause may unfairly restrict their entitlements during any notice period after dismissal should discuss their circumstances with an experienced employment lawyer. 

Seeking qualified, knowledgeable and experienced legal advice from an Ontario employment lawyer should be your first step. Since 1997, Peter A. McSherry has provided employment law legal services to people throughout southern Ontario. From Peter A. McSherry Law Office in Guelph, he has helped them pursue recourse in a range of situations and industries and will work diligently to protect your rights and ensure your working conditions are not only legal, but free of discrimination and harassment. Contact him to discuss the facts of your case, discover the options you have and assess potential damages. Call Peter A. McSherry in Guelph at 519-821-5465 or by e-mail to schedule a consultation.