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Bonus entitlement on termination

bonus-flagIn assessing either termination packages, or damages flowing from wrongful dismissal, counsel is often faced with a myriad of non salaried compensation payable to employees. This compensation includes items such as stock options, stock grants, non monetary benefits such as health and dental insurance, and bonuses. Over the years, the provisions of bonus plans have become more sophisticated, and more complicated. Employers have attempted, with the assistance of counsel, to include provisions for various contingencies in these bonus plans in order to better protect the employer. However, the more complicated the plan, the more difficult it is to assess whether or not a dismissed employee is, in fact, entitled to compensation for bonuses which might have been earned during the period of reasonable notice.

Many bonus plans have two dates which are relevant to the determination of bonus entitlement: the date on which the bonus is declared; and, the dated on which the bonus is paid.

Issues will often arise where an employee is terminated after the date that the bonus is declared but before it is paid. In such circumstances, the employee’s counsel will need to have regard to the terms of the bonus plan which define whether the declaration of the bonus creates an entitlement. In the absence of such provisions, the presumption is that the bonus is not payable unless all of the conditions precedent has been satisfied.

It has long been the law in Ontario that, where a bonus entitlement arises during the period of reasonable notice, that bonus will be payable to the employee.

The more interesting question has arisen recently as to whether or not misconduct by the employee which occurred during the period in which the bonus arose will disentitle the employee to that bonus. In a recent decision of the Ontario Superior Court released on November 17, 2010, the defendant had been the Vice President of the plaintiff company for nine years. He was responsible for all of the plaintiff’s construction projects. In that role, he was entitled to an annual salary of $100,000, together with a bonus equal to thirty percent of the profits earned by the company.

During the course of his employment, the employer discovered that the employee had diverted supplies meant for the company for his own use, as well as diverting company funds to his personal account. When these facts came to light, the employer fired the employee for cause. It also sued the employee for a return of the diverted funds and for losses caused by his actions. The employee counterclaimed for his unpaid salary and bonus.

Rather than proceed with what would have been a complicated trial, the parties agreed to submit the dispute to binding arbitration. The arbitrator found that the employee had acted improperly and ordered damages payable to the employer of $546,452 comprised of $315,452 for the misappropriated assets, and $231,000 to compensate for revenue lost due to delays in contracts caused by the employee’s improper actions. The arbitrator finally held that the employee’s actions were sufficient to give the employer cause to terminate his employment without notice or compensation. He therefore dismissed the counterclaim.

Oddly, the arbitrator found that the employee was entitled to compensation for loss of the bonus he would have received, on the basis that the bonus related work actually performed for the employer and for which the employer benefited.

The employer appealed the arbitrator’s decision with respect to the bonus. The employer took the position that the employee’s actions constituted a repudiation of the contract of employment which disentitled him to any benefit under it. The employer also argued that the employee breached his fiduciary duties which he owed to his employer and was therefore not entitled to the bonus.

The court reviewed the scope of fiduciary duties as described by the Supreme Court of Canada. The court specifically rejected the arbitrator’s finding that the defendant was either an employee or a fiduciary and that these two categories were mutually exclusive and found that an employee can be both an employee and a fiduciary. It is the nature of the relationship itself, rather than the title attached to the employee, that determined the scope of the duties owed by each party to the other. As a fiduciary, the employee was not entitled to prefer his own interests over those of his employer.

Having found that the employee breached his fiduciary duties, the court examines the effect of this breach on his entitlement to the bonus which he was claiming. The court refers to the principle, long established at common law, that fiduciaries are not entitled to compensation for periods when they are in breach of their duties. In order to best compensate parties for breach of such duties, the courts have imposed remedies directed to preventing the fiduciary from profiting from his breach. The court in this case held correctly it seems that, had the employer known about the activities of the employee, it would have terminated the employee immediately and would not have paid him any bonus.

The court further holds that, in general, employees are not entitled to be compensated for periods when they are breaching their obligations to their employer and that bonuses are included in such compensation. The court therefore set aside the arbitral award and dismissed the employee’s claim.

It is always hazardous for an employer to rely on its common law rights to protect its interests, in spite of decisions such as this which uphold those rights. Obligations which are generally described as fiduciary can also be described and imposed by way of Employment Policies and Employment Manuals which will clearly set out the obligations of the parties to the relationship. A clear policy which disentitled an employee dismissed for cause from collecting a bonus might have avoided the expense of litigation in this case.

Earl Altman
Garfinkle, Biderman LLP

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Earl Altman

Legal consultant at EA Consulting
Earl Altman was a partner at Garfinkle, Biderman and now heads his own consulting firm. Earl has practiced commercial and employment litigation. Earl’s practice focuses on employment disputes, including acting for employees and employers in wrongful dismissal claims, and in breach of contract and breach of fiduciary duty claims. Read more
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