Employers with bonus plans may want to take a closer look and their programs or they could end up paying dividends to dismissed employees – that’s the message from one recent case, based in Ontario.
“In an attempt to avoid paying bonuses to terminated employees, many bonus plans contain language stating that employees must be ‘actively employed’ upon the date of pay-out in order to receive a bonus payment,” says leading employment lawyer Vicky Giles.
“[However], a recent decision of the Ontario Court of Appeal has confirmed that such language by itself is not sufficient to deprive an employee, who is terminated without cause, of compensation for a bonus,” she reveals.
In the case Giles is pointing to – Paquette v. TeraGo Networks – TeraGo’s program stipulated that an employee must be “actively employed by TeraGo on the date of the bonus pay-out” in order to receive the reward.
Former employee Paquette had worked for TeraGo for 14 years and held a director’s position at the time of his without-cause termination. The Ontario-based exec participated in the bonus program and received bonuses in each of the 4 years prior to his termination.
Paquette went on to claim wrongful termination and the court determined that he should have been provided with 17 months’ notice so he was therefore entitled to damages equal to the same period.
“The basic principle behind the determination of damages for reasonable notice of termination is that the employee is entitled to everything he or she would have earned if the employee had remained employed during the reasonable notice period,” explains Giles.
“This includes base salary and things like pension/RRSP contributions, benefits, allowances and other perquisites. It can also include bonus payments the employee would have received during the reasonable notice period unless the contract prevents that result.”
Due to Paquette’s long-tenure, he would have been entitled to receive two more bonus payments had he remained employed for the full 17 months reasonable notice period.
“TeraGo took the position that he was not entitled to receive the bonus payments as part of the compensation for wrongful dismissal because the plan required that he be ‘actively employed’ at the time of payout,” explained Giles.
However, the court found that while the terms of a bonus plan can limit an employee’s entitlement to a bonus payment following a without cause termination, the requirement of ‘active employment’ is not sufficient to do so.
“This case reiterates the importance of having clearly worded bonus plans if you wish to limit the entitlement rights of terminated employees,” stresses Giles. “Even more effective is a properly worded termination clause in the employment contract which excludes the possibility of any bonus payment.”
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