Rhonda Levy, George Vassos
Absent exceptional circumstances, 24 months is “high end” of reasonable notice award for certain managers & adverse unilateral changes to bonus plans must be communicated
Early this year, we wrote about Dawe v. Equitable Life Insurance Company, 2018 ONSC 3130, a case in which the Ontario Superior Court of Justice substantially extended the traditional 24 month upper limit on the reasonable notice period for an older, long-term, senior manager who was unable to secure comparable employment.
The motion judge awarded 30 months’ notice and stated that, if asked, he would have awarded 36 months.
The award and ancillary comments set off alarm bells for employers that worried they had lost a vital negotiation tool: the 24 month “cap” on notice periods, which, absent exceptional circumstances, was generally not exceeded in wrongful dismissal judgments. The motion judge’s decision left open the question of whether 30 months - or even 36 months – was now the new “high end” of the appropriate range of reasonable notice for older, long-term, senior managers.
Given the unexpected nature of the motion judge’s decision, it is no surprise that it was appealed. In this analysis, we explain why the Court of Appeal decision, Dawe v. The Equitable Life Insurance Company of Canada, 2019 ONCA 512, released this month, held that the motion judge’s approach to reasonable notice was incorrect.
We also review the implications of the Court’s finding that the employee was entitled upon termination to damages for the loss of his bonus payments under a Long term Incentive Plan (LTIP) and Short Term Incentive Plan (STIP), despite the introduction of a termination provision in the plans intended to restrict this entitlement.
Decision of the Court of Appeal for Ontario
The Appropriate Notice Period
The Court of Appeal relied on its own jurisprudence to reduce the notice period from 30 to 24 months. Specifically, the Court referred to the motion judge’s failure to adopt “the Lowndes approach,” set forth in the leading case on determining proper notice periods, Lowndes v. Summit Ford Sales Ltd. (2006), 2006 CanLii 14 (ONCA), and endorsed ten years later in Keenan v. Canac Kitchens Ltd., 2016 ONCA 79 (CanLII).
The guiding principles of the Lowndes approach are:
- Determination of the notice period is case specific;
- There is no absolute upper limit or ”cap;” and
- Generally only exceptional circumstances will support a base notice period in excess of 24 months.
The Court observed that the motion judge did not conclude that a 30 month notice period was appropriate based on exceptional circumstances. Instead, his decision rested on “his perception of broader societal factors,” such as changes in society’s attitude toward retirement, and the abolishment of mandatory retirement in Ontario.
The Court concluded that the motion judge should have applied the Lowndes line of authority and his own perceptions of societal factors should not have influenced his decision. Furthermore, the Court noted that although the motion judge concluded appropriately that the employee was entitled to a substantial notice period based on his senior position, years of service, age, and difficulty in finding new employment, these factors are “recognized” and “rewarded” by 24 months’ notice, which is at the high end of the appropriate range of reasonable notice for long-term employees.
Entitlement to Damages for Bonus Payments
The Court of Appeal also considered whether the employee was entitled to damages for the loss of bonus under the LTIP and STIP during the notice period following termination without cause. In analyzing this issue, the Court endorsed the two-part test in Paquette v. TeraGO Networks Inc., 2016 ONCA 618 for determining whether a wrongfully dismissed employee is entitled to damages for the loss of bonus:
- Was the bonus an integral part of the employee’s compensation package, triggering a common law entitlement to damages in lieu of bonus?; and
- If so, is there any language in the bonus plan that would specifically remove the employee’s common law entitlement?
The termination provision provided:
Termination without Cause: An Eligible Participant terminated without cause will be entitled to receive only Terminal Awards calculated in sub-paragraph (a)(iv) (below), pro-rated to the last day of active employment, regardless of whether notice of termination is given or not given and regardless of whether termination is lawful or unlawful, and only if the Eligible Participant provides the Corporation with a Full and Final Release in the manner required by the Eligible Participant’s termination letter.
An “Eligible Participant” was defined as someone “employed by the Corporation on the date an award is paid in order to receive an award.” “Terminal Awards” in circumstances of retirement, death, and termination for cause, were pro-rated awards, determined by a complicated calculation.
The motion judge found that the employee was entitled to the bonus payments because:
(a) They were an integral component of his compensation; and
(b) His right to bonus payments during the notice period was not displaced by the termination provisions:
(i) They were ambiguous;
(ii) They were not brought to the employee’s attention and the employer did not meet its obligation to communicate them; and
(iii) The employer’s requirement that the employee sign a release contravened the Employment Standards Act, 2000 (ESA).
The Court of Appeal agreed that the company’s bonus plans were an integral part of the employee’s compensation, giving rise to a common law entitlement to damages in lieu of bonus. It did not agree, however, that the termination provision was ambiguous and found instead that the LTIP and STIP unequivocally restricted the employee’s common law rights upon termination. Nonetheless, the Court concluded that the termination provision could not be enforced because the employer could not prove that the employee accepted it. Nothing in the record provided direct evidence that the employee knew he would be forfeiting large bonus payments even if his employment was terminated without cause, or that this was effectively communicated to him by the employer. The Court thus denied the employer’s appeal of the finding that the termination provision was unenforceable, and did not have to decide the ESA issue.
Bottom Line for Employers
The decision of the Ontario Court of Appeal in Dawe sends an unequivocal message that to determine what constitutes reasonable notice on termination for older, long-term, senior managers, employers should follow “the Lowndes approach,” which provides that absent exceptional circumstances, 24 months is the “high end” of reasonable notice. Notably, the Court emphasized that factors such as an employee’s senior position, long years of service, and advanced age are not exceptional circumstances supporting a notice period in excess of 24 months, and that these factors are already “recognized” and “rewarded” by 24 months’ notice.
In addition, the Dawe decision clarifies that if unfavourable changes to the terms of an employee’s entitlement to a bonus upon termination without cause are to be enforceable, the employer must prove that the employee accepted the changes by introducing evidence that the employee knew about the changes, or that the employer effectively communicated them to the employee. Employers should take specific steps to satisfy their duty to inform beyond merely posting a bonus plan on a company Intranet or delivering a hard copy, such as bringing new limiting conditions to the attention of affected employees, orally or preferably in writing. Employers that cannot demonstrate sufficient notice may be unable to rely on an adverse change to defeat an employee’s bonus claim.
This article was originally published by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.