How Do Bonuses Factor Into Payment In Lieu Of Notice?

Written on behalf of Arbesman Hamilton LLP

For some people, bonuses make up a large part of their total income. However, unlike regular paychecks, bonuses are typically issued at irregular intervals. So what happens when someone is let go from their job before being paid their bonus, particularly if an employment contract says the employee must be employed at the time it’s paid out. This was an issue recently addressed by the Court of Appeal for Ontario.

The employment and dismissal

The employee had worked for the employer, a large commercial real estate company, from September 2001 to August 2004, when he left to work for another company. He returned in February 2009 and was promoted to the position of Managing Director, which included a base salary as well as an annual bonus.

The employee was terminated without cause on January 19, 2017. He received a lump-sum payment in lieu of notice as obligated under the Employment Standards Act, which equaled the equivalent of eight weeks of salary, coverage for all benefits during that period, and a lump sum payment worth about 12 weeks of salary. However, he did not receive any compensation for the bonus he would have earned during the notice period.

The employee responded by bringing an action for wrongful dismissal, also arguing his bonus should have been paid out upon termination since it was an “integral and non-discretionary” part of his compensation package.

The terms of employment stated,

“The company may terminate the employment of the Managing Director by providing the Managing Director the greater of the Managing Director’s entitlement pursuant to the Ontario Employment Standards Act or, at the Company’s sole discretion, either of the following:

  1. Two (2) months working notice, in which case the Managing Director will continue to perform all of his duties and his compensation and benefits will remain unchanged during the working notice period.
  2. Payment in lieu of notice in the amount equivalent of two (2) months Base Salary. [Emphasis added.]

Summary judgment and appeal

The motion judge found that the bonus terms were an integral and non-discretionary part of the employee’s compensation package, and that he should have been paid the amount of the bonus he would have received during the eight-month notice period he should have enjoyed at common law.

The employer appealed this decision, arguing in part that the terms of employment required the employee to be employed at the time the bonus is paid in order to receive it.

The court reviewed the motion judge’s decision on this issue, stating that after the bonus was found to be integral and non-discretionary, the motion judge then considered whether there was anything in the employment agreement that removed his common law right to receive it, landing on the term that stated the employee must be “an employee in good standing with the company at the time bonuses are payable” – disentitled him from damages.”

The employer’s argument that the “good standing” line in the employment contract meant the employee had to be “actively employed,” but the court did not agree. The court focused on what it described as the “inherent unfairness” that comes with employment relationships where people can be dismissed at any time, including right before a bonus is payable. The court wrote,

“There is nothing in the wording of the employment agreement in this case to suggest that the common law right to damages for lost bonus potential in the wake of a termination without cause was contracted out of. I see no error in the motion judge’s finding that the “good standing clause” is tantamount to the “actively employed” clause in Paquette.”

The knowledgeable and experienced employment lawyers at Arbesman Hamilton LLP in Toronto assist clients with navigating the risks and obligations in employment relationships. Contact us online or at 416-481-5604 to book a consultation today.