Employers seeking to avoid paying bonuses to terminated employees during the notice period must ensure their contracts contain explicit and unambiguous language. The rulings in Paquette v TeraGo Networks Inc, 2018 ONCA 618 (“Paquette”) and Matthews v Ocean Nutrition Canada Ltd, 2020 SCC 26 (“Mathews”) clarify that the entitlement to bonuses during the notice period hinges on whether the bonus is an integral part of the employee’s compensation and whether the contract explicitly restricts this entitlement. The courts will scrutinize any restrictive clauses and require that they clearly cover the circumstances that arise upon termination. These decisions underscore the importance of precise contractual drafting and recognizing employees’ common law rights to compensation during the notice period.
Employment Standards Act, 2000 (“ESA”): Defining “Wages” and Payment Obligations
Central to the discussion is the ESA’s definition of “wages,” which encompasses various forms of employee compensation. Nevertheless, bonuses, notably those dependent on the discretion of the employer and unrelated to hours, production, or efficiency, are explicitly excluded from the ESA’s definition of wages.
Section 11(5) of the ESA sets forth stringent timelines for wage payment post-termination, mandating that employers disburse any entitled wages within a specified timeframe, typically within seven days after termination or the next scheduled payday, whichever is later. Complementing this provision, Section 13(1) prohibits employers from withholding or deducting wages without proper authorization.
THE TEST
While the ESA provides clear guidelines, its application in practice can be complex, particularly regarding discretionary bonuses. Despite this, substantial case law exists regarding employee bonus entitlements following termination.
The courts have articulated a two-part test to determine if a terminated employee is entitled to their bonus during the notice period:
- Integral Part of Compensation: Was the bonus an integral part of the employee’s compensation package, thereby triggering a common law entitlement to damages in lieu of the bonus?
- Restrictive Language: Is there any language in the bonus plan restricting the employee’s common law entitlement to damages in lieu of a bonus over the reasonable notice period?
Discretionary vs. Non-Discretionary Bonuses
- Discretionary Bonuses: Employees must demonstrate they would have been entitled to the bonus during the notice period. If the employer can show deficiencies in the employee’s performance that would have led to the denial of the bonus, the employer might successfully defeat the claim. However, a denial cannot be based on bad faith due to the termination.
- Non-Discretionary Bonuses: If the bonus is non-discretionary and forms a part of the employee’s compensation, it is generally owed during the notice period unless explicitly restricted.
Paquette v TeraGo Networks Inc (2018 ONCA)
In Paquette, the employee was wrongfully dismissed and claimed entitlement to a bonus. The bonus provision in the contract required the employee to be actively employed on the date of the bonus payout in order to be entitled to the bonus. The trial judge found that while the employee was notionally an employee during the reasonable notice period, he was not actively employed at that time.
The employee appealed, and the appeal was allowed, resulting in a 17-month notice period and the awarding of the bonus. The Ontario Court of Appeal ruled that the dismissed employee is entitled to compensation for all losses arising from the employer’s breach of contract and lack of notice.
Van Rensburg JA determined that courts must ask whether the employee is entitled to the bonus and whether the contract clearly restricted that entitlement during the notice period. If an employer wants to limit a dismissed employee’s entitlement to a bonus or compensation for loss of a bonus during the notice period, the employer needs to point to clear and explicit language in the contract that takes away that benefit from the contract.
Matthews v Ocean Nutrition (2020 SCC)
In Matthews, the Supreme Court of Canada endorsed the Paquette two-part test to determine whether an employee should be entitled to damages for unpaid bonuses. The court ruled that employees have a common law right to everything they would have received had they worked through the notice period, including bonuses, where the employee’s entitlement to the bonus is triggered during the notice period.
To limit an employee’s common law right to the bonus during the notice period, the employer is required to use unambiguous language in the contract or bonus plan. Clauses that purport to limit an employee’s entitlements will be held to very high standards before the court enforces them for the employer’s benefit. These clauses must be brought to the employee’s attention and must meet the employment standard minimums to be enforceable.
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