Thursday, May 31, 2012

Bonuses and Active Employment

Back in September, I made this entry about the enforceability of a contractual or policy term which requires the employee to be "actively employed" as of a certain date to be eligible for a bonus.

For example, if the year's bonuses are announced and paid out in December, and I work the whole year until being dismissed at the end of November, and my notice period would carry me past the bonus date, but there's a term in my contract saying that I must be "actively employed" when the bonuses are announced in order to be eligible for a I still entitled to the bonus?

The answer was "Sometimes".  It depends on the circumstances.  In Poole v. Whirlpool, which I discussed in that entry, the employee was not bound by the requirement for "active employment" because the company had inadvertently neglected to ensure that he was aware of it.

I went on to comment that I believe there is room for refinement of this doctrine in light of the requirements of the Employment Standards Act, and that such language should be unenforceable if it purports to deprive a dismissed employee of a bonus which is not "purely discretionary" though the vesting date may occur during the statutory minimum notice period.

More recently, the Superior Court decided the case of Sandhu v. Solutions 2 Go Inc., dealing with a motion for summary judgment on a similar issue, and moving a large step in the direction I proposed in my earlier post.

The Facts

Ms. Sandhu was employed by Solutions 2 Go from November 2005 until her dismissal on May 25, 2010.  The parties settled all issues except for her entitlement to participate in the company's profit-sharing plan in respect of the company's fiscal year which ended March 31, 2010.

The company had implemented this profit-sharing plan in 2006, and it entailed declaration of a total bonus amount, which was then divided up into 'full shares' and 'half shares', employees who had been there for the full fiscal year getting a full share and employees who had been there between six and twelve months of the fiscal year getting a half share.  (New employees, hired in the last six months of the fiscal year, would receive nothing.)

The bonus in respect of the 2010 fiscal year was declared and paid June 18, 2010, with a full share being slightly over $16,000.  Ms. Sandhu, in her employment, earned $13.50 per hour.  $16,000 would be pretty substantial for her.  But, having been dismissed 24 days earlier, she received nothing.

The company took the position that (a) it was a discretionary bonus and management was not under a contractual obligation to pay it at all (though it was acknowledged that, once the bonus was declared, its distribution was fixed), and (b) in any event it was only payable to people still actively employed.  While it had not been put in writing at first, the 'active employment' requirement never came to Sandhu's attention until a memo was posted to that effect in 2009.  (The Court also notes that the employer attempted to get all employees to sign a contract implementing that language in December 2010, but Ms. Sandhu didn't sign it.  That date is seven months after Ms. Sandhu's dismissal, so I'm not sure how it would even be relevant if the date's right.)

The Decision

The Court applied s.61 of the Employment Standards Act and found that, even if the employer's position were accepted regarding the preconditions for payment of the bonus, the fact that the bonus was paid within her statutory minimum notice period meant that she could not be deprived of it.  Describing the requirements on the employer through the notional statutory notice period, the Court noted that the employee must receive "what the employee would otherwise have been entitled to receive from the employer".

The Court goes on to note that this provision not only includes wages, "but also precludes an employer from altering any term or condition of employment which is of financial benefit to the employee during the statutory notice period".

The definition of 'discretionary' as it had been applied to the profit share was vague, and at its highest the discretion extended only to whether or not to announce a bonus and the aggregate amount thereof.  The Court therefore applied a simple but-for test:  Had Ms. Sandhu been given the notice contemplated in the Act, she would have been there on the date the bonus was declared and paid, and therefore entitled to receive it.

Thus, Ms. Sandhu was awarded the amount of the bonus.

My Thoughts:  Bonuses are often "Wages"

The Court's approach to s.61 of the Act is interesting, but there`s something missing.

The section guarantees payment of termination pay "in a lump sum equal to the amount the employee would have been entitled to receive under section 60".  Section 60 contemplates actual notice and sets out obligations on the employer through the notice period, including that the employer "shall not reduce the employee's wage rate or alter any other term or condition of employment", and pay the employee all the "wages" the employee is entitled to receive (and at minimum the amount the employee would receive in a "regular work week").  Both sections 60 and 61 require the employer to continue to make "whatever benefit plan contributions would be required to be made in order to maintain the benefits" of the employee through the notional notice period.

Nowhere is the phrase "financial benefit to the employee" used, and I'm not sure the Court was correct to interpret that into the section.

What is really interesting is that the Court doesn't seem to be interpreting the term "wages" as capturing this bonus, but nonetheless considers the bonus to be caught by the catch-all prohibiting the employer from altering "any other term or condition of employment".

Now here's what's missing:  At s.1(1) of the Act, there's a definition of wages, which is expansive and includes, among other things, "monetary remuneration payable by an employer to an employee under the terms of an employment contract, oral or written, express or implied", but specifically excludes "any sums paid as gifts or bonuses that are dependent on the discretion of the employer and that are not related to hours, production, or efficiency."

Does this change the analysis?  It's arguable.  In statutory interpretation, when there are two possibly-conflicting provisions, one should generally look to the more specific (as opposed to more general) provision.

It's clear that, when a bonus is not "dependent on the discretion of the employer" and/or related in some way to hours, production, or efficiency, that bonus falls within the definition of "wages".  Thus, there is an argument to be made that bonuses should not fall within the scope of "any other term or condition of employment".

That being said, I also believe that the disposition of the case is correct; I doubt that the entitlement to participate in the declared bonus could fairly fall within the exclusion for purely discretionary bonuses.  The trial judge is very astute to the policy issues involved:
The logic for these provisions is obvious.  Otherwise, an employer could take advantage of an employee by terminating the employee immediately prior to a large payout and paying the employee just the wages portion during statutory notice period.  This could apply in many situations such as profit sharing, stock options, commissions, Christmas bonus and so on.
(NB:  Commissions would clearly fall within the statutory definition of wages.)

More Thoughts:  The actual length of the statutory notice period shouldn't matter

There's something else missing here, too:  The trial judge finds that enforcing the 'active employment' requirement would have a result which is inconsistent with the ESA, and appears to conclude that because the bonus was declared within the minimum notice period, she was entitled.  This isn't going far enough.  A contractual provision which is not consistent with the ESA is void ab initio, regardless of whether or not its application in the specific case would yield a result which is permissible under the ESA.

That's the argument I was making in my earlier entry, at least, and it is much less hypothetical now.  This case is a precedent for the basis of that argument, that an "active employment" clause is subject to scrutiny under the framework of the ESA.


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. 

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