No Bonus for You: Can Employers Withhold Bonuses after Dismissal?
A review of recent Ontario Court of Appeal cases on employee bonus entitlements after employment ends.
You’ve worked hard this year. You’re looking forward to your annual performance bonus. But just before the bonus is due, your employer fires you. “No bonus for you,” they say. “You have to be actively employed to get your bonus. See? It says so right here in your contract.”
Seems unfair. Can the employer do this? The answer is a resounding, “Sort of, but not quite!”
The Basic Rule
When an employer dismisses an employee without sufficient advanced notice, the employee is entitled to compensation for all lost pay during what would have been the appropriate “notice period” as determined by the court.
Paquette and Lin (August 9, 2016), Yes Bonus
In both Paquette and Lin (released the same day), the court rejected the employer’s arguments that contractual language restricted the bonus payments owed:
- Paquette’s contract said that employees had to be “actively employed…on the date of the bonus payout” to be “eligible for a bonus;”
- One of Lin’s bonus plans said that if the employee was terminated, “no bonus shall be earned or payable”; and
- Lin’s other bonus plan said that entitlements “not yet vested at the time of termination shall be forfeited forthwith without any right of compensation.”
The court didn’t think this language was enough to deprive the dismissed employees of the bonuses they would have received during their notice periods.
The court reasoned that when a contract speaks of termination of employment, it presumptively contemplates only “lawful” termination with sufficient advanced notice. The only reason the employees weren’t “actively employed” on the bonus payout dates was because the employers breached their contracts by firing them without proper notice.
Paquette and Lin were therefore awarded compensation for their annual bonuses whose payout dates fell within their notice periods. This included:
- their full bonus for the partial year worked before dismissal; and
- their full bonus for the following year in which neither worked at all.
Lin also received a further prorated bonus (under one of his plans) for the months at the end of his notice period for which the bonus payout date fell outside the notice period. (Paquette didn’t ask for a similar prorated payment.)
Say Something More
In both Paquette and Lin, the court did allow for the possibility that an employer could use “clear” contractual language to say something “more” and effectively deny employee bonuses after employment ends.
Kielb (May 5, 2017), No Bonus
Kielb was such a case. In that case, Kielb sought a prorated bonus for a year he partially worked. The court denied him any bonus because the bonus payout date fell just outside of his notice period.
The trial judge described Kielb’s contract as “both enticing in its promises and cruel in its execution.” It contained limiting language which said Kielb’s bonus “does not accrue, and is only earned and payable on the date that it is provided.” The contract also said that Kielb “waived” any “bonus or portion thereof” that “would ordinarily be paid” after his termination date and notice period.
Kielb’s bonus had therefore not accrued when he was terminated, and it did not accrue during his notice period.
The Court of Appeal looked favourably upon this language, holding that “it was open to the parties to agree how and when any bonus was declared, earned, accrued and would be payable.” The court did not cite its prior decisions in Paquette and Lin.
Bois (November 8, 2017), No Bonus
Bois is another case where the employee was denied his bonuses.
In Bois, bonuses were awarded to employees annually but were payable in equal installments over the following three years. When Bois voluntarily resigned, he wanted to be paid his outstanding “future installments” for bonuses already awarded during his employment.
Citing Kielb, the court denied Bois’ claim, giving effect to contractual language which required him to be employed “on the payout date [to] be eligible to receive a payment.” Thus, the court regarded the “future installments” as being neither “wages payable” nor “wages to which he was entitled.”
Bain (February 27, 2018), Yes Bonus
Three months later, the court reached a different result in Bain.
Bain’s bonus plan also had a “deferred” component where, instead of cash, 60% of the bonus was placed into an account in the form of “notional shares” which would “vest” in the future. The employer argued that Bain shouldn’t be compensated for any deferred bonus whose vesting date fell outside of the notice period.
The court concluded that “while the notional shares would not have vested before the end of the reasonable notice period, there is no question that the bonus was ‘earned’ by Bain during that period.” Bain was accordingly compensated for his entire deferred bonus even though it would have vested outside the notice period.
Does Any of This Make Sense?
These fives cases seem to have very different results:
- some employees are denied payments for periods they worked;
- other employees are granted payments for periods they didn’t work;
- still other employees are denied recovery of deferred payments previously “awarded” because they’re seen as not “payable;”
- while others are granted recovery of deferred payments because they’re seen as clearly “earned.”
Some of these differences are perhaps explained by subtleties of the language used in each employment contract. (But your reward for reading this far is to be spared a detailed linguistic analysis.)
Ultimately, the tension in this area of law arises out of competing perceptions of what a bonus is:
- For the employee, a bonus is hard-earned pay;
- For the employer, a bonus may be seen as some gratuitous extra, paid to motivate employees to work harder or to stay with the company longer.
When the relationship ends, the employee still wants their pay, but the employer no longer has any interest in dangling a carrot.
While these cases are mindful of employee interests, they also appear to carve out a very wide discretion for employers to carefully draft contracts which severely restrict a dismissed employee’s ability to recover portions of pay.
This discretion may incentivize employers to adopt non-standard forms of compensation where pay is characterized as a “bonus” and is paid on a deferred schedule with entitlements lost upon termination. This could create significant unfairness for employees who toil for several years building a book of business — and a corresponding reserve of anticipated performance bonuses — only to find their entitlements evaporate upon termination.
Despite the Court of Appeal’s recent guidance, disputes over bonus entitlements will likely continue to be a mainstay of employment law litigation in Ontario.
[Edit: On April 13, 2018, the Ontario Court of Appeal released its decision in Singer v. Nordstrong Equipment Limited, 2018 ONCA 364 (CanLII), another bonus case. A brief case commentary on Singer can be found here as an addendum to this article.]