Canadian Employment Law Today

Canadian HR Reporter, 2019 Bonus policies and wrongful dismissal damages Recent cases clarify how employers can avoid bonus payments over the notice period BY MATTHEW TOMM E ntitlement to bonus payments can be a bone of contention when em- ployees are dismissed and their rea- sonable notice is being determined. e recent Ontario Court of Appeal deci- sion Dawe v. e Equitable Life Insurance Company of Canada provides an impor- tant example of a policy that was effective in limiting the dismissed employee's en- titlement to a bonus. Other recent juris- prudence gives further guidance as to what works and what doesn't, which employers can draw on to draft better policies. e legal framework It is common for companies to require their employees to be "actively employed" as of the payment date to be eligible for bonus payments. Employees who are dismissed without notice prior to the payment date are then denied bonuses that would have accrued over the notice period, being appar - ently ineligible under the straightforward terms of the plan. However, in Paquette v. TeraGo Networks Inc., the Ontario Court of Appeal rejected that approach, finding that a requirement of "active employment" alone is not sufficient. TeraGo's bonus program provided that an employee who was "actively employed by TeraGo on the date of the bonus payout" was eligible for a payment, but not other - wise. But the Court of Appeal concluded that the dismissed employee's claim was not for bonus pursuant to the terms of the plan but was rather for damages for the loss of opportunity to earn bonus, which would have been earned if the employer had given reasonable notice of termination. e court in Paquette held that, first, it must determine whether the bonus plan was an integral part of the employee's com - pensation package, which would entail a right to common law damages for its loss. At common law, an employee is entitled to damages that place him in the position he would have been in but for the without-no - tice dismissal, which generally means com- pensation for whatever would have been paid until the end of the reasonable notice period. Second, if the right to common law damages applies, the court must decide whether the terms of the bonus policy re - strict or abrogate that right. at is, does the language clearly remove the right to damages over the notice period for the loss of opportunity to earn bonus? TeraGo's simple requirement of "active employment" did not pass muster. It al - lowed the employee to argue that, but for the wrongful dismissal, he would have been ac- tively employed as of the payment date and consequently he should get the payment. Paquette ushered in an era of uncertainty around what language would be effective to restrict entitlement to bonuses that accrue after termination. A recent employer success Dawe v. Equitable Life Insurance Company reviewed eligibility under short-term and long-term incentive plans. Both plans pro- vided that: • "An Eligible Participant must be employed by the Corporation on the date an award is paid in order to receive an award." • An Eligible Participant terminated with - out cause will be entitled to receive only pro-rated awards "to the last day of active employment, regardless of whether no- tice of termination is given or not given and regardless of whether the termina- tion is lawful or unlawful…" (e prorat- ed awards were defined as the "Terminal Awards" and in this case amounted to considerably less than what would have been earned over the notice period.) • "Awards earned and awards actually paid shall not be considered in determining any entitlement to termination, severance or common law notice or payments in lieu of notice." e lower court followed the Paquette analysis and concluded that the plans were unclear and did not successfully dis - place the employee's right to common law damages for breach of contract. e judge pointed out that, in some key clauses, there was no specific reference to common law entitlement or the statutory notice period. "Simply put," the judge wrote, "the wording is unclear and confusing." However, the employer's argument fared better on appeal. e Court of Appeal re - viewed the same clauses and was satis- fied they were sufficient to oust the right to common law damages. e court held that the motions judge erred in reading the clauses in isolation from one another. Read - ing the plans as a whole, there was no am- biguity. ey went beyond stipulating that "active employment" was a precondition for receiving a bonus. ey "anticipated the very event that occurred" — the employee's dismissal without cause — and thereby re - stricted the employee's common law rights on termination. Further guidance from the jurisprudence e jurisprudence following Paquette has evolved and now paints an increasingly clear picture of what language will suffice to dis- entitle employees to bonus pay after termi- nation, and what will not. Many employers will recognize the following examples (for better or for worse) in their own policies. Notable cases where the language was enforced are: • Carroll v. ATCO Electric Ltd: is case ad - dressed a stock options plan and a Share Appreciation Rights plan. Both plans pro- vided that any options/rights that have not vested as of "the date on which the participant actually ceases to be an officer or employee of the Corporation … (with - out regard to any statutory or common law notice periods which may otherwise be required for the termination of em- ployment) shall immediately terminate…" e court found that the parties had con- tracted to extinguish any right of recovery where the employee does not work during some or all of the notice period. COMPANIES generally don't want to pay their dismissed employees bonuses that accrue after the termination date. But drafting policies to achieve that is easier said than done. Matthew Tomm looks at a series of court decisions that examine circumstances when dismissed employees are and aren't entitled to bonus payments following termination. 4 CASE IN POINT: TERMINATIONS BACKGROUND A requirement of 'active employment' alone is not sufficient if the bonus payout occurs during the reasonable notice period.

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