Almost exactly one year ago, we wrote a blog about how bonuses factor into payment in lieu of notice. This month, the topic has made legal headlines across the country following a Supreme Court of Canada decision related to how bonuses should be applied to employees of a company who have been terminated.
The employee started working for the employer in 1997. He was an experienced chemist and held a number of senior management positions with the employer. Like other senior executives, the employee was enrolled in the employer’s long term incentive plan (“LTIP”). The LTIP was designed as an incentive to keep top employees and drive the company’s success. Upon the arrival of a “realization event” such as the sale of the company, payments would be triggered to those enrolled in the plan.
Ten years after starting work with the employer, a new Chief Operating Officer was brought into the company. The new COO marginalized the employee, limiting his responsibilities and lying about his status with the company. The employee was not happy at work, but wanted to stay due to the prospect of a pay-off under the LTIP. However, after four years of working under the new COO, the employee left.
The company was sold for $540 million 13 months after the employee left. The sale qualified as a realization event, and eligible employees received payouts. The employee involved in the trial did not. He filed an application stating that while he left the company, his leaving was a result of constructive dismissal. The trial judge agreed, stating the employee was owed a reasonable notice period of 15 months, meaning he would have been an employee at the time of the sale.
The case made its way to Nova Scotia’s Court of Appeal where the employee was awarded payment in lieu of notice for the 15-month-period, but was not entitled to damages related to missing out on the LTIP payment.
The court began its explanation of its decision by stating that employers can prompt employees to leave their job, and that doing so results in constructive dismissal, which is subject to a duty to provide reasonable notice. The court noted that an absence of good faith is not required to trigger this duty. Instead, it’s simply the failure to provide reasonable notice. That said, the actions of the employer may lead to additional damages.
The court stated that two questions must be asked to determine if damages should include bonus payments in cases where notice was not provided. The first is whether but for the termination, the employee would have been eligible for the bonus. The second is question is triggered if the first is answered in the affirmative. The second question asks whether the terms of the bonus would otherwise take away or limit the right to receive the bonus.
In this case, the court stated that had the employee been given proper notice, he would have received payment from the LTIP, which did not limit his ability to do so in such a situation. As a result, the employee passed both steps necessary in the test.
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