Are employees entitled to bonuses after the employment relationship is terminated?
Upon the termination of employment without cause, being by no fault of the employee, the employee will generally be entitled to reasonable notice of termination or pay in lieu thereof, under the common law, or at the very least, to the minimum standards set out in the Employment Standards Act (the “Act”). Whether the common law standard or the Act apply will depend on the employment agreement, if there is one, and if so, on whether it is enforceable. Once the appropriate period of notice is determined, the law requires that the employer provide the employee with his or her full compensation for the notice period, which may include salary, benefits, and bonuses. Where an employee is entitled to a bonus as part of the regular compensation, the employer may have to pay such bonuses that the employee would have been paid or earned during the notice period.
The employee’s entitlement to a bonus payment during the notice period will largely depend on whether the bonus is an integral part of the employee’s compensation, and if so, on whether the employment agreement contains a valid and enforceable clause that prevents the employee from requesting a bonus payment after termination.
To determine if the bonus constitutes an integral part of the employee compensation, the Court will consider various factors such as whether the bonus was discretionary, based on performance or any other metric, or if the employee was entitled to the bonus by reason of his or her continued employment and the payment was based on a pre established formula. For example, where an employee is entitled to a non-discretionary annual bonus of 20% of the employee’s salary, which is in fact paid annually, the Court is likely to find that it constitutes an integral part of the compensation, and thus should be paid through the notice period, both where payable or accrued, absent an enforceable agreement to the contrary. On the other hand, where the employee’s agreement stipulates that he or she may receive a performance-based bonus, at the employer’s full discretion, it is unlikely to be considered as an integral part of the compensation.
In order to avoid paying employee bonuses throughout the notice period, employers often include language in the employment agreement that require employees to be “actively employed” or a “full-time employee” to be entitled to the bonus. The Ontario Court of Appeal found in Paquette v. TeraGo Networks that such provisions, on their own, are unenforceable. This is so because damages for wrongful dismissal arise as a result of a breach of the employment contract, and when awarded, require the employer to put the employee in the same position it would have been but for that breach, meaning, what the employee would have earned during the notice period if given proper notice. The Court in Paquette found that the employer could not rely solely in a provision requiring the employee to be “actively employed” to withhold a bonus payment, given that the employee was only unable to be “actively employed” due to the employer’s failure to provide proper notice.
In an additional decision regarding employee bonuses upon termination, the Ontario Court of Appeal, in Andros v. Colliers Macaulay Nichols Inc., held further that where the bonus is deemed to be an integral part of the employee’s compensation package, the employee will be owed both, the bonus earned while employed which became payable during the notice period, and, if any, the bonus which would have been earned during the notice period that would become payable even after the notice period has expired.
The Court in Paquette and Andros held that, where the employer wishes to limit the employee’s entitlement to a bonus through the notice period, it must draft a clear and unambiguous clause that restricts the employee’s rights under the common law. Where the Court finds that no such clause exists, or it was poorly drafted, the employer will not be able to rely on it to withhold bonus payments that become payable, or would have been earned, during the notice period.
As lawyers with broad expertise in employment law, we often advise our clients with regard to the appropriate compensation package they are entitled to based on the common law, the ESA, and their employment contract. You may contact us at any time with your employment law questions.
