What is an employer’s responsibility to pay bonuses to an employee who resigns after the year in which he or she earns a bonus, but before payment has occurred?

The Ontario Court of Appeal (“OCA”) tackled this question once again in Bois v MD Services, 2017 ONCA 857.

Facts

The appellant, Mark Bois, worked for the employer for approximately 14 years. Mr. Bois was awarded bonuses under his employer’s Variable Incentive Plan (“VIP”), where a bonus was payable in equal installments over the 3 years following the calendar year for which the bonus was awarded.

Mr. Bois resigned in 2011, before the payout dates for the third installment of his 2009 bonus and two installments of his 2010 bonus. Mr. Bois started an action seeking these instalments, which amounted to nearly $115,000.

The employer’s VIP contained provisions regarding entitlement to payments. Further, a letter from the employer, signed and agreed to by Mr. Bois, stated:

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 issue in this appeal was whether the requirement to “continue to be so employed”, as per the employer’s VIP, conflicted with the Employment Standards Act, 2000 (“ESA”).

Mr. Bois argued that the effect of s. 11(5) of the ESA was to accelerate his employer’s obligation to pay out future installments, regardless of the language in the VIP. Further, he argued that that the VIP disentitling him to future instalments was a violation of ss. 13(1) of the ESA.

Analysis

The Court held that the requirement of continued employment in the employer’s VIP did not conflict with the ESA and Mr. Bois’s appeal was dismissed.

The OCA agreed with the lower court’s interpretation that the VIP requires an employee to continue to be employed with the employer on the date of the bonus installment payout to receive the installment. Since Mr. Bois resigned before the incentive pay date, he became ineligible to receive the bonus payment.

The Test and Previous Cases Finding for the Employee

In a Paquette v. TeraGo Networks Inc., 2016 ONCA, which we wrote about here, the OCA found that the relevant provision in employee’s contract did not limit the employee’s claim to the bonus. The contract simply stated, that the employee must be “actively employed by TeraGo on the date of the bonus payout”. The Court looked at more than if the term “actively employed” was ambiguous. Rather, the wording of the bonus plan was viewed broadly in determining that the employee’s award was not to be limited.

The court outlined a test to determine whether a terminated employee is entitled to damages on account of a lost bonus. The court will ask:

1. does the employee have a common law right to damages for breach of contract that would include compensation for a lost bonus?
2. is there language in the bonus plan that unambiguously alters the common law entitlement?

In another case where the court found for the employee, the employee was entitled to the bonus for the time he worked, as well as what he would have earned during the 18-month notice period. Read more about this case here. 

A third decision that found for the employee is Lin v OTPPB 2015 ONSC, which we wrote about here. The court held that the employer’s annual incentive plan was integral to the Mr. Lin’s compensation. The court reiterated that there are different types of bonuses and in this situation, the bonus was significant and non-discretionary. Even though Mr. Lin was not working with the employer at the time the bonus compensation was paid, he was entitled to bonus income that he would have earned during the reasonable notice period.

What Do These Inconsistent Decisions Mean?

The Bois case seems to be in line with the principle of freedom of contract. the Court stated that it is open to the parties to agree how and when any bonus was declared, earned, accrued and would be payable. As shown above, however, not all judges consistently apply this principle in the employment law context.

This begs the question, when will contractual language purporting to limit an employee’s right to bonus pay be enforced?

Previous cases illustrate a variety of factors to consider. Not only should employers use clear language and unambiguous provisions, employers should also consider the type of bonus it is. Considering the increasing complexity in this area, employers should consult a legal professional to determine the sufficiency of their contractual provisions on bonus awards.

We note that the OCA sided with the employer in the Bois case where the employee resigned whereas the OCA sided with the employee in the Paquette and Lin cases where the employee was terminated. The court in Bois stated that Mr. Bois had notice of the active employment eligibility requirement and knew (or ought to have known) that when he resigned, he would forfeit his bonus award.

If you are looking for experienced employment lawyers to review or draft your bonus entitlements provisions, contact us at [email protected] or 647-204-8107 and one of our lawyers would be happy to assist you.

For 30 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him directly at 416-317-9894 or at [email protected]