What Happens to Bonuses and Stock Options After Termination?

Written on behalf of Peter McSherry

When an employee is terminated in Ontario, one of the most contentious issues that often arises is what happens to unpaid bonuses and unexercised stock options. These forms of compensation are frequently significant components of an employee’s total remuneration, particularly for executives, senior professionals, and employees in the financial, tech, and corporate sectors. Yet the legal treatment of bonuses and stock options after termination can be complex and highly dependent on the employment contract and surrounding circumstances.

An Overview of Termination and Compensation

In Ontario, employees who are terminated without cause are typically entitled to common law reasonable notice, and at the bare minimum, the entitlements set out under the Employment Standards Act. During the notice period (whether working notice or pay in lieu), employees are generally entitled to the compensation and benefits they would have earned had they remained employed throughout that period.

This principle is foundational when assessing claims for post-termination bonuses and stock options. If these benefits are part of the employee’s regular compensation, and there is no clear and enforceable contractual language removing them upon termination, courts will often find that the employee remains entitled to them during the notice period.

Are Bonuses Part of Compensation?

The first legal question in any bonus-related dispute is whether the bonus is truly discretionary or whether it forms an integral part of the employee’s compensation. Courts in Ontario have consistently held that even if a bonus is described as “discretionary,” it may still be enforceable if it has been paid regularly and is a significant part of an employee’s earnings.

Factors that courts will consider when determining whether a bonus is enforceable include:

• The frequency and consistency of past bonus payments;
• Whether the bonus is linked to individual or corporate performance;
• Whether the bonus is used to attract or retain talent; and
• How the bonus is characterized in the employment agreement or company policy.

When bonuses are found to be integral to an employee’s compensation, they are more likely to be included in wrongful dismissal damages unless the employment contract or bonus plan contains clear language that excludes bonus entitlement after termination.

The Role of Contract Language

Whether an employee is entitled to a bonus after termination often depends on the specific wording of the employment contract or bonus plan. Courts examine these documents to determine whether the employee’s right to a bonus survives the end of employment.

Employers may try to rely on language that limits bonus eligibility to “active employees” or that requires an employee to be employed “on the date of payout” or “at year-end.” However, these provisions are not always enforceable. For such clauses to be upheld, they must be clear, unambiguous, and brought to the employee’s attention. Vague or ambiguous language may be construed against the employer in court.

In many cases, Ontario courts have found that vague or ambiguous language will be construed against the employer. For example, in Paquette v. TeraGo Networks Inc. (2016), the Ontario Court of Appeal held that an employee was entitled to a bonus as part of his wrongful dismissal damages because the bonus was an integral part of his compensation and the employer’s plan did not clearly remove that entitlement upon termination.

Constructive Dismissal and Bonuses

Employees who resign due to constructive dismissal may also face disputes over their bonus entitlement. If the constructive dismissal amounts to a wrongful termination, the employee may still be entitled to receive the bonus as part of their compensation during the reasonable notice period. Again, the key issue will be whether the bonus was integral to the employee’s compensation and whether the plan includes enforceable language limiting post-termination eligibility.

Constructive dismissal cases can be especially fact-dependent, and employers may argue that resignation disqualifies the employee from future compensation. This makes it crucial for employees to seek legal advice before resigning or challenging the loss of a bonus after a constructive dismissal.

Stock Options and Equity Compensation

The treatment of stock options and other equity compensation (such as restricted share units or performance share units) after termination is governed primarily by the terms of the applicable equity plan or stock option agreement. Unlike bonuses, which are often governed by general principles of compensation law, stock options are contractual and may have specific vesting and expiry provisions.

It is not uncommon for equity plans to state that unvested stock options are forfeited immediately upon termination, and that vested options must be exercised within a short window, sometimes as little as 30 to 90 days. These provisions can be enforceable if clearly written and properly communicated.

However, courts may scrutinize these agreements to ensure they are not unconscionable or contrary to public policy. In some cases, courts have awarded damages to employees for lost stock option opportunities if the termination deprived the employee of the chance to realize significant equity gains that would otherwise have accrued during the reasonable notice period.

Employment Standards Act and Minimum Entitlements

The Employment Standards Act (ESA) does not provide specific rules regarding bonuses or stock options upon termination. However, minimum entitlements to termination pay, severance pay, and benefits continuation may indirectly affect compensation rights.

It is essential to distinguish between an employee’s statutory minimum entitlements under the ESA and their common law rights to reasonable notice and full compensation during that period. ESA minimums are just that: minimums. Many bonus and stock option disputes arise in the context of wrongful dismissal claims seeking full common law damages.

Considerations When Negotiating Your Exit

If you are being terminated and you have bonuses or equity compensation at stake, negotiating the terms of your departure is crucial. Many termination packages initially offered by employers exclude bonuses or provide a reduced payout. With legal advice, employees can often secure a more favourable settlement, especially where the contract language is ambiguous.

Employees should also be careful not to sign a release or severance agreement that waives their rights to bonus or stock compensation without first reviewing the terms and understanding what they are giving up.

Compensation Is More Than Just Wages

Bonuses and stock options are not mere perks; they are critical components of many employees’ total compensation. What happens to them after termination depends on a complex interplay of contract language, legal precedent, and employment standards.

In Ontario, courts are increasingly willing to scrutinize employer policies and contractual clauses that attempt to limit compensation rights. Employees should not assume that just because they are no longer employed, they automatically lose entitlement to bonuses or equity. Instead, the legal analysis requires a careful examination of the employment relationship, the nature of the compensation, and the clarity of any limiting provisions.

Peter A. McSherry Employment Lawyer: Trusted Advice on Termination Packages in Guelph

If your termination package excludes a bonus or equity payout, don’t assume you’re out of options. Peter A. McSherry Employment Lawyer can review your contract, bonus plan, and equity agreements, assess what should be included during the notice period, and negotiate a fair resolution. Before you sign a release (or let stock options lapse), reach out for timely, practical advice online or call us at 519-821-5465.