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Entitlement to bonus after dismissal: The debate continues

It appears that where the terms of an incentive plan or entitlement to a bonus after dismissal are clearly and unambiguously set out, in writing, consistently implemented, and known/agreed to by the employee, they are likely to be upheld by the courts.

bonus after dismissalThe issue of whether or not an employee is entitled to receive a bonus after their employment ends has received significant judicial attention over the last few years, with often inconsistent results. In November, 2017, the Ontario Court of Appeal weighed in on this debate in its decision in Bois v MD Physician Services Inc. In this post, we will discuss what the Court’s decision in Bois tells us about where the law might be heading.

As we’ve written about before (on Rudner Law blog), by default, the concept of “pay in lieu of notice” includes all forms of compensation that an employee would have received if they had continued to work throughout the relevant period of notice, including salary, benefits, bonuses, commissions, car allowance, etc. Employers and employees are free to modify this legal presumption through an enforceable contract or policy, but the onus will be on the party relying on the exception to show that it was clearly agreed upon by both parties. Bonuses that would have been paid during the notice period are one form of compensation that employers frequently attempt to “opt out” of, with varying success. In many cases, this will involve the employer attempting to place limitations on an employee’s eligibility to receive a bonus if they are no longer “actively employed” when the bonuses are paid out.

This was the case in Bois, where the employer had set out language in a letter, signed and agreed to by the employee, which limited the employee’s entitlement to a bonus as follows:

In any given year, you must be a permanent employee of the CMAH Group of Companies on December 31 of the year for which the incentive is paid and continue to be so employed on the payment date(s) to receive a payment. Any employee who is no longer employed with the organization or has given notice of termination prior to the payout date will not be eligible to receive a payment.

The employer’s Variable Incentive Plan (“VIP”) also contained similar language. Bonuses awarded under the VIP were payable in equal installments over the three years immediately following the calendar year in which they were earned.

The employee resigned from his employment in October, 2011, prior to the payout dates of the final installment of his 2009 bonus and two installments of his 2010 bonus. When the employer refused to pay the remaining incentive installments to the employee, he sued. Among other things, the employee argued that the terms of the VIP violated section 11(5) of the Employment Standards Act, 2000 (the “ESA”), which requires an employer to pay “any wages to which the employee is entitled” within a set timeframe following the termination of an employee’s employment, as well as section 13, which prohibits employers from withholding wages payable to an employee unless the employer is authorized to do so. The employee argued that as he had already “earned” the bonuses for 2009 and 2010, section 11(5) effectively accelerated the employer’s obligation to pay-out the future installments relating to same. Further, the employee argued that the employer could not disentitle him to the future installment payments, as this would constitute a violation of the prohibition against withholding wages found in section 13.

The employer brought a motion for summary judgment to dismiss the action, which was successful. The motion judge found that the VIP contained a clear requirement that the employee be actively employed on the date of a bonus installment payout in order to be eligible to receive it. She also found that the employee was aware of, and had agreed to, the terms of the VIP, and knew (or ought to have known) that when he resigned he would be forfeiting his entitlement to any as yet unpaid incentive payments. Finally, she found that the VIP did not violate the requirements of the ESA. The employee appealed only the motion judge’s findings with respect to the violation of the ESA.

In upholding the motion judge’s decision to dismiss the action, the Court of Appeal reiterated that it is open to the parties to agree “how and when any bonus [is] declared, earned, accrued and [will] be payable”. The terms of the VIP clearly demonstrated such an agreement. Further, the eligibility requirements set out in the VIP did not result in a violation of the ESA, as the bonus installment payments would only constitute “wages” upon each of the future payout dates. In other words, at the time the employee resigned, the future bonus installment payments could not be considered “wages”, as, pursuant to the terms of the VIP, the employee had no entitlement to receive such payments at that time.

The Court’s decision in Bois aligns with its earlier decision in Kielb v National Money Mart Company, which also dealt with the issue of an employee’s entitlement to receive a bonus after the end of his employment. In that case, the employment agreement contained a bonus clause which clearly indicated that the bonus did not accrue and was only earned and payable on the payout date, and that if the employee’s employment ended prior to that payout date, he would “waive any claim to that bonus or any portion thereof”. The Court of Appeal upheld this clause, similarly rejecting the employee’s argument that such a limitation on his entitlement to the bonus would constitute a violation of the ESA.

The decisions of the Court of Appeal in both Bois and Kielb indicate a willingness on the part of the courts to hold parties to the strict terms of the agreement they bargained for. As a result, it appears that where the terms of an incentive plan are clearly and unambiguously set out, in writing, consistently implemented, and known/agreed to by the employee, they are likely to be upheld1. However, as past cases such Lin v. OTPPB have demonstrated, even if there is a contract or policy which might say otherwise, the court may not enforce it where the result is unduly oppressive to the employee.

In light of these recent developments in the case law, employers would be wise to review their current agreements and policies with respect to bonuses and ensure that any eligibility requirements upon termination are clearly set out and have been expressly communicated to employees. Similarly, employees should proceed with caution when entering into employment agreements with a new or current employer that seek to impose restrictions on their bonus entitlements. Given the above, it is crucial that employees ensure they fully understand the terms they are agreeing to, especially if a bonus forms a significant part of their compensation package, to avoid any unpleasant surprises at the conclusion of the relationship.

By Brittany A. Taylor, Rudner Law

1 See also the decision of the Ontario Superior Court of Justice in Singer v Nordstrong Equipment Limited, where, even in the absence of a written employment agreement or bonus policy, the court declined to award an employee damages in lieu of his bonus during the reasonable notice period.

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Rudner Law, Employment / HR Law & Mediation

Employment Lawyers and Mediators at Rudner Law
Rudner Law specializes in Canadian employment law and mediation. Rudner Law provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. Stuart Rudner is a leading HR Lawyer and founder of Rudner Law. Stuart and his team speak and write frequently on HR Law issues. Read more
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