In Ontario, 2015 has introduced new law about bonuses when an employee is terminated, specifically:
a) if the employee is entitled to be paid bonus or incentive payments accrued as of the date of termination; and
b) if the employee is entitled to loss of bonus during the reasonable notice period.
Typically, employers insert language into employment agreements to try to avoid paying bonuses (accrued and future) to employees that are terminated. Generally this language requires active employment when the bonus decision is made in order to be eligible. Employers have in the past successfully avoided paying bonus compensation to terminated employees on this basis.
2015 ushered in change to this area.
Now, as a result of the cases this year, language contained in an employment agreement requiring the employee to be actively employed at the time a bonus payment is paid in order to be eligible for that payment can still be enforceable, if drafted properly, but the new (since 2014) general duty of good faith contractual performance can override that and help an employee defeat an otherwise enforceable clause in an employment agreement for no bonus entitlement on termination.
The important cases this year about bonus treatment on a termination of employment:
Lin v. OTPPB (2015 Ontario Superior Court No. 3494)
Paquette v. TerraGo Networks Inc. (2015 Ontario Superior Court No. 4189)
Kielb v. National Money Mart Company (2015 Ontario Superior Court No. 3790)
Styles v. Alberta Investment Management Corporation (2015 Alberta Queens Bench No. 621)
Another important case that is now being incorporated into the bonus issue is Bhasin v. Hrynew (2014 Supreme Court of Canada No. 71). In this case, the highest Court determined that parties to a contract must perform their contractual duties honestly, reasonably, in good faith and not capriciously or arbitrarily. This has now been incorporated into employment law, including in the context of whether a terminated employee is to receive compensation for loss of bonus, either as of the date of termination (accrued bonus) or for the reasonable notice period.
For example, in the Styles case, the employee was terminated without cause and with no explanation before he received payments he had accrued under a long-term incentive plan.
The Alberta Court held the exclusion clause in the employment agreement to be ambiguous it was not enforced against the employee. The Court also held that although the employer did have the contractual right to terminate at any time without cause, the employers decision to exercise that right and its contemporaneous refusal to pay any of the long-term incentive grants constituted an unfair and unreasonable exercise of its discretionary powers.
The Court said:
When an employment contract includes a condition for the receipt by an employee of a benefit under the contract and the employer has the discretion, pursuant to the terms of the contract, to frustrate the satisfaction of that condition, it becomes even more important for that discretion to be exercised fairly, reasonably and not arbitrarily.
Where does that leave us?
Employers need to be very careful in drafting their employment agreements, if they wish to limit entitlement to bonus compensation on termination. If they do, and those clauses are successfully drafted and survive judicial scrutiny, they must be still be exercised in good faith, or they will be of no effect and the bonus will be payable (plus costs, presumably).
This WARDS PC BLAWG is for general information only. It is not legal advice, or intended to be. Specific or more information may be necessary before advice could be provided for your circumstances.
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