The Canadian courts’ approach to dealing with bonus plans on termination of employment is not always consistent as demonstrated by two recent decisions. The Supreme Court of Canada’s recent recognition of a “duty of good faith” in contractual dealings[1] may now add another dimension to how the courts address this topic.

In Paquette v TeraGo Networks Inc,[2] the Ontario Superior Court held that specific and unambiguous language in a bonus policy requiring that an individual be actively employed at the time of the bonus payout meant an employee terminated prior to the payout date was not eligible to receive a bonus. Mr. Paquette was employed with TeraGo Networks Inc. in Calgary, Alberta for approximately 14 years prior to his termination without cause. Under TeraGo’s Bonus Program, employees “actively employed by TeraGo on the date of the bonus payout” were eligible for a bonus. Mr. Paquette’s employment was terminated prior to the date upon which the company’s bonuses were paid. The Ontario Superior Court held that Mr. Paquette was not entitled to a bonus despite the fact that the bonus payout date fell within his reasonable notice period.

The Alberta Court of Queen’s Bench recently came to a different conclusion in Styles v Investment Management Corp.[3] In this case, the Company’s long-term incentive plan (“LTIP“) program stated that an individual must be an active employee at the time of vesting in order to be paid the LTIP grant. LTIP grants vested four years after they were awarded. Mr. Styles’ employment was terminated without cause before his grants vested.

Mr. Styles argued that the LTIP grants were earned wages that formed part of his compensation package, and the Company was acting in bad faith in refusing payment. The Alberta Court of Queen’s Bench agreed with him and interpreted the LTIP Program to allow for extended vesting in certain circumstances. The Court determined that the Company was exercising its discretion when it decided to dismiss Mr. Styles without cause and prevent him from accessing LTIP payments. Relying on the Supreme Court of Canada’s decision in Bhasin, which recognized a “duty of good faith” in contractual dealings, the Alberta Court determined that the Company had an obligation to use its discretionary power fairly, honestly and with appropriate regard for the legitimate interests of Mr. Styles including the high quality of his work, his exemplary employment record, and the lack of reasons given for his termination. Even though Mr. Styles’ termination without cause was permitted under the terms of his employment contract, the Company’s denial of LTIP payments was arbitrary and unreasonable. The Alberta Court concluded that the Company’s actions contravened the duty to act in good faith and awarded Mr. Styles $444,205 – the approximate value of the LTIP payments.

Although there are factual differences between the two cases, the Paquette and Styles decisions demonstrate inconsistency between Canadian courts when it comes to awarding bonus payments upon termination. The Styles decision is being appealed to the Alberta Court of Appeal so it remains to be seen if this inconsistency will be perpetuated. In the interim, employers should be aware that the language contained in bonus plans and LTIP programs requiring an employee to be actively employed at the time of payment or vesting is very important, but its enforceability may be challenged. Employers should be prepared for more claims based on the Supreme Court of Canada’s reasoning in Bhasin focusing on the duty of good faith in contractual dealings.