Bonuses and Severance Pay

It is a simple and well-established legal principle that an employer who dismisses an employee without any notice and without cause must provide that employee with pay in lieu of notice of termination (i.e. “severance pay”). How much notice (or severance) a dismissed employee should receive is often not a very complicated question. However, a question that is sometimes complicated is what components of an employee’s compensation should be figured into the calculation. Base salary? Of course. Commissions? Those too. But what about bonus entitlements upon termination? Overtime pay? Health benefits? Stock options? Company car?

Bonus and Severance Packages: General Rule

The general rule is that pay in lieu of notice of dismissal in Ontario and British Columbia is intended to include all forms of compensation, and not just base salary, as employers routinely offer. This should include bonuses, overtime pay, commissions, health-related benefits, disability coverage, car allowance, and any other form of compensation the employee would have received if he/she had continued to work during the relevant period of notice.

With respect to bonuses specifically, so long as the bonus payments formed an integral part of an employee’s compensation, then, subject to the specific terms of any bonus plan or policy, the employee is entitled to any bonus payments that would have been provided during the reasonable notice period.

How this simple principle is actually applied in practice has led to dramatically different results over the past few years. Oftentimes the cause of this inconsistency is the treatment of contractual provisions that seek to limit an employee’s entitlements to bonus payments only if that employee is “actively employed” at the time of the payment.

Case in point: the Ontario Superior Court of Justice released three wrongful dismissal decisions in June and July 2015 which concerned, in part, the treatment of annual bonuses and long term incentive plans during the reasonable notice period. In each case, the specific terms of the bonus plan contained language that stated that the employee had to be actively employed on the date the bonus was paid in order to be eligible for the bonus. In each case, the court agreed on the basic law to apply, but came to different conclusions about the employee’s entitlements.

In Lin v. OTPPB (2015 ONSC 3494), the employee’s compensation included an annual incentive plan and a long-term incentive plan. He was terminated without cause prior to the payout date for either bonus payment. The Court found that both bonus plans were integral components of the employee’s total compensation. Despite the existence of a contractual stipulation that required the employee to be actively employed at the time the bonus is paid, the Court found that the plaintiff was nonetheless entitled to the annual incentive bonus payment.

The Court also awarded the employee compensation for bonus payments under the long-term incentive plan that would have accrued and become payable during the reasonable notice period.

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In both Paquette v. TerraGo Networks Inc. (2015 ONSC 4189) and Kielb v. National Money Mart Company (2015 ONSC 3790), the Court found that limiting language in the bonus plan documents was sufficient to disentitle the employees in those cases from receiving a bonus when their employment was terminated without cause before the bonus would have been paid. Notably, in the Kielb case, the Court wrote that while some of the provisions of the employment agreement, including the bonus payment clause, may be viewed as harsh, harshness of the provision alone does not render it invalid if both parties have agreed to it. It is our understanding that the Kielb case has been appealed.

While these cases vary depending on their facts, it is clear that bonuses are an important part of an employee’s pay, and certainly not to be overlooked upon termination. Employee-side lawyers will fight for their client to receive full pay for a reasonable notice period, including any bonuses that may have been earned during that time. At the same time, employer counsel will work to uphold carefully crafted bonus policies that contractually limit an employee’s entitlements.

Although some bonus plans are structured specifically to apply only to “active“ employees, meaning employees that are still present at work during the bonus period, the courts do not always agree. As the cases above demonstrate, it is more likely that employees will be entitled to any bonuses that could have been earned during the notice period, especially if those bonuses are a significant source of the employee`s overall income.