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Employment & Labour

OCA clarifies bonus entitlement for terminated employees

A recent Ontario Court of Appeal judgment may resolve a long-standing question in the courts as to whether terminated employees are entitled to bonus payments earned during their notice period, says Toronto labour and employment lawyer John De Vellis.

"Historically, there’s been a fair amount of uncertainly around the issue of bonus payments in wrongful termination cases,” he tells AdvocateDaily.com.

“Employers fall back on their bonus policies that state employees are eligible to receive bonuses if they’re employed as of a specific date, whereas employees generally argue they should be deemed to be actively employed until the end of the notice period.”

A recent judgment from Ontario’s highest court clears up any confusion, and is expected to have corporate legal teams scrambling to amend employment contracts, says De Vellis, a partner with Shibley Righton LLP.

In Paquette v. TeraGo Networks Inc., 2016 ONCA 618, (CanLII), appellant Trevor Paquette asked the court to vary an existing judgment to grant him damages of $58,386.64 — his calculation for the loss of two bonus payments he would have received during the notice period of 17 months.

The case turned on whether Paquette was considered actively employed during the notice period of his termination, explains De Vellis, who was not involved with the case, but comments generally.

The Court of Appeal concluded the motion judge erred in principle in his approach to the question of whether the “active employment” term in TeraGo’s bonus plan excluded compensation for lost bonuses as part of the appellant’s wrongful dismissal damages.

“The appellant is entitled to additional damages for wrongful dismissal equal to the bonuses he would have earned during the 17 months following his termination,” the ruling states.

De Vellis says the impact of the decision will be felt by corporate human resources departments across the province, and he expects many will revise their employment agreements to limit exposure, especially in cases of terminating long-standing employees.

“Let’s say you have a 20-year employee who is terminated in March, but has a notice period of more than eight months,” De Vellis says. “According to this decision, they would be deemed to be actively employed as of Dec. 31, and would therefore be eligible to receive any bonuses that would have been earned during that time frame had they received working notice.”

The ruling serves as clear guidance for courts that active employment includes the notice period, whether the employee is still actively working or not, he says.

“The motion judge should have determined whether the appellant’s common law right to damages for compensation and benefits that he would have earned during the reasonable notice period, including the bonus that was part of his compensation package, was effectively limited by the 'active employment' condition in the bonus plan,” the decision states.

De Vellis notes the vast majority of wrongful dismissal cases don’t end up in court. Instead, employees and employers engage in a series of negotiations where bonuses are, generally, one of the most contentious issues.

“The issues around bonus entitlement are always most contentious when you’re trying to negotiate a severance package,” he says.

With this ruling, the court makes it clear that in cases where the employee would have received the bonus and the notice period falls within that time frame, they are entitled to receive bonus payments, De Vellis says.

“I think it’s pretty significant as it clears up what has been a murky area in wrongful dismissal actions."

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