What Happens To Your Bonus If You’re Fired Before It Is Paid Out?

Written on behalf of Arbesman Hamilton LLP

People whose employment compensation includes bonuses often rely on the promise of a bonus when making financial or other life plans. But what happens when someone is fired from their job just before they were to receive a bonus? Are they still entitled to it? It’s a question the Ontario Court of Appeal addressed in a recent decision.

Employee is fired but not paid his bonus

The employee was an investment banker who was dismissed without cause from his job on February 28, 2013. His employer testified the dismissal was the result of a merger between two of the company’s departments. At trial, the judge determined the employee was entitled to a reasonable notice period of 18 months and awarded damages related to the notice period as well as deferred bonuses and outstanding vacation pay.

A complicated bonus structure

The employer’s bonus structure was slightly complicated. If he were set to earn a bonus of more than the equivalent of 250,000 Swiss Francs, 40% of the bonus would be paid in cash (“the cash bonus”), while the remaining 60% would be paid in the form of shares of the employer company, which would vest over time (“the deferred bonus”).

The employer appealed the decision, but did not raise the issue of the determination of the period of reasonable notice, the finding that the employee’s bonus was an integral part of his compensation, or the calculations used by the trial judge to calculate what his bonus would have been during 2012. They also did not appeal the judge’s decision to award the employee the cash bonus. The point of appeal was the awarding of the deferred bonus, which amounted to the portion of the shares the employee would have received had he been employed during the 18-month notice period even though not all of the shares would have vested during the notice period (some would have vested after the notice period came to an end). The employee was awarded approximately $1.2 million for the deferred bonus at trial.

The employer’s position is that the employee was only entitled to receive bonus payments from shares that would have vested during the notice period and not after its conclusion.

Determining what is owed

The court applied a test established in an earlier Ontario Court of Appeal Decision. In order to determine an employee’s entitlement to damages on account of a lost bonus, the court must determine whether the employee has a common law right to damages breach of contract that would include compensation for a lost bonus. The second step of the test is to consider whether there is language in the bonus plan that “unambiguously alters or removes” the common law entitlement.

In looking at the first step of the test, the employer admitted at trial that the employee would have been awarded the company shares had he been employed during the notice period. Additionally, the employee’s letter of hire stated that upon termination the employee would receive “not less than six (6) months’ notice or compensation in lieu thereof”, and that “for greater clarity, the amount of equivalent compensation [would] be determined by reference to salary and bonuses” But the employer did not offer any compensation related to bonus pay, instead offering just 14 months of payment in lieu of salary. However, the Ontario Court of Appeal had already ruled in Taggart v. Canada Life Assurance Co. (2006), 50 C.C.P.B. 163 (Ont. C.A.) that “where an employer terminates an employee without cause, the employer is liable for damages for breach of contract, measured by the loss of wages or salary and other benefits that would have been earned during the reasonable notice period”.

In this case, the court ruled that while the shares would have been paid out after the notice period concluded, the shares were earned by the employee during the course of his employment and must be paid out. The court upheld the trial judge’s decision and dismissed the appeal.

Arbesman Hamilton LLP advises both employees and employers in all matters of employment law. We can help employers draft contracts with policies aimed at avoiding confusion and litigation while also helping employees understand their rights and obligations. Contact us online or call us at 416-481-5604 to schedule your consultation today.