In 2016, the Ontario Court of Appeal ruled in Paquette v TeraGo Networks that an employee was entitled to receive bonus income following termination without cause, in the absence of clear plan language to the contrary. Years on, how has this affected employee contracts – and what changes can employers make to safeguard themselves against unwanted payments post-termination?
Andrea York, Partner at Blake, Cassels & Graydon, talked to us about the issue.
When do bonuses need to be paid out post-employment?
From a Canadian employment law perspective, the common law includes an implied term that all employees are entitled to notice or a payment in lieu upon termination of employment without cause. The payment in lieu of notice typically includes all compensation that would have been payable to the employee for the period of notice - including bonuses. However, you can contract out of that common law requirement with proper provisions in the bonus plan or contract of employment. So, if you’re determining whether you may have to pay bonuses post-termination, you have to look at the nature of the bonus and terms of the plan or contract. The most influential case on this issue at this time in Ontario is Paquette v TeraGo Networks.
Could you tell us a bit more about Paquette v TeraGo Networks?
This case initially proceeded on summary judgement, but the judge did not award damages in lieu of bonus. The employee, Paquette, then appealed that decision at the Court of Appeal – which reversed the lower court decision and instead found that a reference to the employee being “actively employed” on the date of the bonus pay-out was not sufficient to contract out of a former employee’s right to compensation for lost bonuses post-termination. The court laid out a couple of steps, the first one being to consider the common law rights by determining whether the bonus is an integral part of compensation – if the answer is yes, you then need to look at whether the plan unambiguously alters or removes that right.
Does the language used in the contracts play a large part in the ultimate decision?
Absolutely. With respect to the first part of the analysis, it’s probably not that high of a threshold to say that a bonus is integral to an employee’s income if that person receives a similar bonus payment every year. So, then you’d have to look into the terms of the plan, and look for very specific language which contracts out of the common law. It may not be sufficient anymore to say in a plan that no bonuses are paid on “termination of employment” or that employees not “actively employed” will not receive a bonus. The courts really like to see specific language which refers to what happens following the notice of termination and whether the employee has waived any right that he or she may have had to bonuses during the notice period. With clear language in a bonus plan or agreement, an employer may contract out of the requirement to pay bonus income in respect of that period.
What advice would you give to employers crafting bonus plans?
Obtain legal advice. We typically recommend clearly referencing the treatment of bonuses for the period of employment up to the date on which the employee is notified of termination and for the period of reasonable notice in the bonus plan or employment agreement. Careful drafting is required.
Also, other case law has highlighted the importance of bringing a revised bonus plan to an employee’s attention. Courts will look at whether the employee signed off on the changes, whether the employee objected to the changes and how the employer responded. Even if you do have that perfect language in the plan, the contract itself still needs to be enforceable.
At the end of the day, if you have an enforceable agreement or plan with the proper language, then it is quite possible to contract out of the common law requirements – but not the requirements of employment standards legislation.
Would you say the law tends to favour the employer or the employee?
Canada is known to be an employee-friendly jurisdiction. As such, ambiguity in the contract or the plan will typically be read in the employee’s favour, not the employers. That’s why it’s so important to ensure the langue used will do what you want it to.
The above is intended to be informational and is not and does not constitute legal advice or an opinion.
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