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The Pendulum Swings Toward Employees Regarding Bonus Entitlements

September 22, 2016

Authors: Joseph Oppenheim and Spencer Hoffman

The Pendulum Swings Toward Employees Regarding Bonus Entitlements

Bonuses are typically used by businesses to incentivize employees to perform better. However, when bonuses are paid year after year, they become reasonably expected components of annual compensation. Complications arise when employers seek to exclude such bonuses from pay in lieu of notice.

Employers frequently implement a policy that makes “active employment” a condition for bonus eligibility. This seems perfectly clear. If employees are dismissed without cause, they are no longer “active” and bonuses are forfeited. Numerous cases suggested that such policies were enforceable if clearly worded and brought to the employees’ attention when they were hired. However, the recent Ontario Court of Appeal case of Paquette v. TeraGo Networks Inc.[1] represents a departure from those decisions. The Court ruled that merely making “active employment” a condition for bonus eligibility will not allow an employer to exclude bonuses from its severance obligations to employees who have been dismissed without cause.

Employees have the contractual right to work and be paid their expected salary and bonuses through the notice period. When an employer chooses to dismiss an employee without cause and refuses to allow the employee to work through the notice period, the employer becomes liable to pay damages for breach of contract. Such damages are measured as the compensation that the employee would have received had he or she been given proper notice of termination. The Court ruled that merely requiring “active employment” at the date of bonus payment does not amount to an explicit agreement by the employee to alter or remove his or her right to damages in the event of a wrongful dismissal.

We have gleaned two lessons from this case. First, the old proverb “the more you sweat in peace, the less you bleed in war” applies. Employers are well served by contracts of employment that have clear and enforceable severance terms applicable in the event of a without cause dismissal. We generally recommend that employment contracts include clauses that allow severance to be determined by a clear formula that leads to a specific amount, coupled with clear language that the employee is entitled to nothing more in the event of a without cause dismissal. Secondly, this case is a reminder that courts do not interpret employment contracts in the same way as commercial contracts between parties with equal bargaining power. Rather, courts tend to protect employees from perceived oppressive or unfair employment terms. Employers should govern themselves accordingly.

2016 ONCA 618