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Bonus Payments – Do They Form Part Of A Severance Package?

Thursday, September 01, 2016 - Filed in: Courts
bonus
Many employers have annual bonus plans which provide additional compensation to employees upon the achievement of certain objectives. In an attempt to avoid paying bonuses to terminated employees, many bonus plans contain language stating that employees must be “actively employed” upon the date of payout in order to receive a bonus payment. A recent decision of the Ontario Court of Appeal has confirmed that such language by itself is not sufficient to deprive an employee, who is terminated without cause, of compensation for a bonus.

In the decision of Paquette v. TeraGo Networks Inc., TeraGo’s program provided that an employee must be “actively employed by TeraGo on the date of the bonus payout.” Mr. Paquette worked for TeraGo for 14 years and held the position of Director, Billing and Operation Support Services at the time of his without cause termination. Mr. Paquette participated in the bonus program and received bonuses in each of the 4 years prior to his termination. No contractual termination clause existed and Mr. Paquette sued for damages for the wrongful termination of his employment. The Court determined that Mr. Paquette should have been provided with 17 months’ notice of the termination of his employment and therefore was entitled to damages for 17 months of reasonable notice.

The basic principle behind the determination of damages for reasonable notice of termination is that the employee is entitled to everything he or she would have earned if the employee had remained employed during the reasonable notice period. This includes base salary and things like pension/RRSP contributions, benefits, allowances and other perquisites. It can also include bonus payments the employee would have received during the reasonable notice period unless the contract prevents that result.

Because of the timing of Mr. Paquette’s termination, he would have been entitled to receive two more bonus payments if he had remained employed during the 17 month reasonable notice period. TeraGo took the position that he was not entitled to receive the bonus payments as part of the compensation for wrongful dismissal because the plan required that he be “actively employed” at the time of payout. As he had been terminated prior to the payout date, he was not “actively employed”. The Court found that while the terms of a bonus plan can limit an employee’s entitlement to a bonus payment following a without cause termination, the requirement of “active employment” is not sufficient to do so.

This case reiterates the importance of having clearly worded bonus plans if you wish to limit the entitlement rights of terminated employees. Even more effective is a properly worded termination clause in the employment contract which excludes the possibility of any bonus payment. We recommend that you seek legal advice before implementing your bonus plan and would be pleased to assist.

Note: This a reprint of an article by Vicki Giles of McLennan Ross LLP.