Be on the Lookout for the Bonus Pony: Without Careful Language, a Terminated Employee will be Able to Ride It Away into the Sunset

March 2017

Article by: Graeme McFarlane

A recent Ontario Court of Appeal decision has once again highlighted the challenges associated with controlling bonus payments for terminated employees. In Paquette v. TeraGo Networks Inc., 2016 ONCA 618, the Court awarded damages for a bonus falling within the notice period despite the fact that the bonus plan had specific language requiring “active employment” for any amount to be paid.  The summary trial judge had found that the “active employment” requirement disentitled the employee to receive any bonus payment.  The Court of Appeal disagreed.

The Facts

Mr. Paquette was a 14 year employee and was paid a base salary and bonuses. The bonus plan required that an employee be actively employed in order to be eligible to receive the bonus.  The trial judge awarded a 17 month notice period, but declined to award any amount for a bonus based on the restrictive language.  The only issue that was before the Court of Appeal was whether or not the bonus should have been paid.

The Decision

The Appeal Court applied a very strict test when considering the bonus entitlement issue. The trial judge had narrowly focussed on whether or not the “active employment” requirement was ambiguous.  In finding that this language was understood by all parties, he then held that the bonus was therefore not payable.

Upon reconsideration, the Appeal Court found that the judge has erred in narrowing his focus in this way. The Appeal Court said that the judge should have adopted a two-part test.  First, he should have determined whether the bonus would have been payable had the employee worked during the 17 month notice period.  Second, if the bonus would indeed have been payable, the question became whether there was an express limitation prohibiting such a payment.  The Court held:

[The] error was in looking to the terms of the bonus plan, and its requirement of “active employment”, and then concluding that because that term was unambiguous, and [Paquette] could not meet the requirement, no amount for bonus would be included in his damages. The motion judge ought to have commenced his analysis from the premise that [Paquette’s] common law right to damages was based on his complete compensation package, including any bonus he would have received had his employment continued during the reasonable notice period, and then examined whether the bonus plan specifically limited or restricted that right.

Adopting the principles laid out in the earlier decision in Taggart v. Canada Life Assurance, 2006 CanLII 53345, the Court went on to say that restrictive language has to clearly override the common law presumption that upon termination an employee would be entitled to receive all remuneration he/she would have received had he/she worked during the notice period.  Accordingly, the “active employment” restriction was not sufficient by itself to discharge this presumption.  The Court awarded Mr. Paquette approximately $60,000 in damages on account of this bonus.

What does this mean for Employers?

This case once again highlights the importance of properly drafting bonus provisions if the intent is to make such payments only to employees who are actively working at the time the bonuses are paid. While this can be done, the drafting can be challenging.  Courts have approved such language, but those provisions make specific mention of what specific payments will be made if the employment relationship has ended prior to the bonus payment.  This case is a clear exception to the general rule that brevity is best.