Sunday, September 4, 2011

Does an employer need to pay the bonus due during the notice period?

It's simple and well-established law that the employer who dismisses an employee without notice and without just cause must provide pay in lieu of notice. How much notice should be provided is often complicated, but a question that is sometimes equally complicated is what compensation aspects should be figured into the calculation.

Salary's easy, but what about bonuses? Health benefits? Company car?

The default answer is...everything. But bonuses are more complicated than that. Purely discretionary bonuses can be difficult for an employee to pursue, but if there's a consistent pattern of bonuses in the past, or a fixed mechanism for calculating bonuses, then there's a chance. If there's a bonus structure worked into the employee's contract, and/or if the bonus can be said to be an integral part of the compensation package, the employee is in a very good position to make a claim for the bonus.

However, these are all common law defaults, subject to the freedom of contract, and it is not uncommon to see contractual language or language in the policy establishing the bonus structure that states that employees must be actively employed as of a particular vesting date in order to be entitled to the bonus for that period of time. (For example, if you want your annual bonus, you have to be actively employed as of December 31st of that year. If you quit your job on December 30th, you get nothing.)

However, if the employee hasn't been made aware of that limitation, then the employer can't rely on it. In the recent case of Poole v. Whirlpool Corporation, Mr. Poole was on international assignment when the Bonus Plan was implemented in 2005, and was never advised of the 'active employment' requirement until after his termination in 2010. Accordingly, he remained entitled to his bonus throughout the notice period, which the Court found was 19 months. This bonus entitlement ultimately amounted to more than $100,000 through the notice period.

Other points of interest in this case include the choice of proceeding: While it was certainly not a Simplified Procedure case (the overall judgement ended up being in excess of half a million dollars), the plaintiff moved for summary judgment, leading affidavit evidence. The main issues appear to be the length of the notice period, entitlement to the bonus, and entitlement to other benefits, but there were no major factual disputes. Neither party cross-examined the other side on their affidavits, and so the proceedings were relatively expeditious. However, "relatively expeditious" is still expensive - the Court ended up awarding the plaintiff partial indemnity costs in the amount of $25,000.

Thoughts on Bonus Limitations

Where the bonus limiting language exists, and the bonus is not established to be an integral part of the compensation structure, the limtation can be upheld. However, I believe that there are difficulties with this approach that have not been explored in the jurisprudence.

We start, as I have said, with the default position that the employee is entitled to receive, as pay in lieu of notice, compensation for anything he would have received had his employment been continued through the notice period. When there is bonus language implemented in a manner insufficient to constitute a binding term of the contract, it cannot rebut that common law presumption - when you are terminated, your entitlement to damages for pay in lieu of notice continues to include everything you would have received had you been actively employed through the notice period. This issue is similar to the one I argued when dealing with the share repurchase agreement in Love v. Acuity Investments, in a previous blog I maintained. (See footnote below.)

Where there is ostensibly binding contractual language stating that an employee must be actively employed at certain dates, such that the bonus will not be payable if terminated prior to such dates, then this must be seen in light of certain restrictions surrounding entitlements on termination: The Employment Standards Act, 2000 sets minimum requirements for notice periods which cannot be contracted out of, and these minimum requirements have only one relevant exclusion, being for purely discretionary bonuses "that are not related to hours, production or efficiency." In other words, where bonuses are not purely discretionary, or are based at all upon hours, production, or efficiency, any contractual provision which purports to relieve the employer of the obligation to provide such bonuses on termination would be void.

All that being said, I think such language should generally be sufficient to avoid any pro rata calculation of bonuses: If the notice period proceeds past the vesting dates, the employee gets the bonus. If not, he doesn't. (This is usually reflected in the existing law, though I note that my other thoughts may not be.)


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

Love v. Acuity Investments footnote:

Put briefly, the Court of Appeal in Acuity held that a termination without notice (in the absence of just cause) is, in and of itself, a contractual breach, ending the employment immediately and entitling the employee to damages...and therefore, a separate share repurchase agreement allowing the employer to repurchase employee-owned shares at the end of employment could be triggered immediately upon such termination, without waiting for the end of the notice period, and therefore the employee has no claim to damages based on subsequent appreciation in the value of the shares. I would argue that this decision is simply internally inconsistent: If the employer has no contractual right to terminate the employment relationship immediately, then the compensation principle entitles the employee to monetary damages to put him into the same position he would have been in but for the breach of contract - i.e., had he been allowed to continue to hold the shares to the end of the notice period.

1 comment:

  1. Update: Whirlpool unsuccessfully appealed to the Ontario Court of Appeal.