Annual bonuses, short term incentive plans, and long term incentive plans have become important tools to reward exceptional performance and retain key employees. When an employee who is entitled to participate in these plans is terminated, the treatment of these forms of compensation is not always clear.

The general rule is that an employee is entitled to all forms of compensation that the employee would have earned over the reasonable notice period. So long as the bonus plan formed an integral part of an employee’s compensation then, subject to the specific terms of the bonus plan or policy, the employee is entitled to compensation under that plan that would have been provided during the reasonable notice period.

How this deceptively simple principle is applied in practice has led to dramatically different results. Oftentimes the cause is the treatment of specific provisions that seek to limit entitlements to bonus payments only if the employee is actively employed at the time of the payment. Case in point: the Ontario Superior Court of Justice released three wrongful dismissal decisions in June and July this year which concerned, in part, the treatment of annual bonuses and long term incentive plans during the reasonable notice period. In each case, the specific terms of the bonus plan contained language that stated the employee had to be actively employed on the date the bonus was paid in order to be eligible for the bonus. In each case, the court agreed on the basic law to apply but came to different conclusions about the plaintiff’s entitlements.

In Lin v. OTPPB (2015 ONSC 3494), the employee’s compensation included an annual incentive plan and a long-term incentive plan. He was terminated without cause prior to the payout date for either bonus payment. The Court found that both bonus plans were integral components of the employee’s total compensation. Despite the existence of a contractual stipulation that required the employee to be actively employed at the time the bonus is paid, the Court found that the plaintiff was nonetheless entitled to the annual incentive bonus payment. The Court also awarded the employee compensation for bonus payments under the long-term incentive plan that would have accrued and become payable during the reasonable notice period.

Alternatively, in both Paquette v. TerraGo Networks Inc. (2015 ONSC 4189) and Kielb v. National Money Mart Company (2015 ONSC 3790), the Court found that limiting language in the bonus plan documents was sufficient to disentitle the employees in those cases from receiving a bonus when their employment was terminated without cause before the bonus would have been paid. Notably, in the Kielb case, the Court wrote that while some of the provisions of the employment agreement, including the bonus payment clause, may be viewed as harsh, harshness of the provision alone does not render it invalid if both parties have agreed to it. The Kielb case has been appealed.

In Styles v. Alberta Investment Management Corporation (2015 ABQB 621), the Alberta Court of Queen’s Bench added a new wrinkle in the analysis by viewing the problem through the lens of good faith contractual performance. Madam Justice Yungwirth determined that a provision in an employment agreement which required an employee to be an active employee on the date a bonus is paid in order to be eligible for that payment would violate the duty of good faith contractual performance.

Recall in the Supreme Court of Canada’s landmark decision in Bhasin v. Hrynew (2014 SCC 71), the Court found that parties to a contract must perform their contractual duties honestly, reasonably, in good faith and not capriciously or arbitrarily. In Styles, the employee had been terminated without cause and without explanation prior to the maturity of a number of payments under a long-term incentive plan. Madam Justice Yungwirth found the exclusion clause to be somewhat ambiguous and refused to enforce it. She ruled that while the employer did have the right under contract to terminate employment at any time without cause, the employer’s decision to exercise that right and the corresponding refusal to pay any of the long-term incentive grants amounted to an unfair and unreasonable exercise of its discretionary powers. Madam Justice Yungwirth wrote:

When an employment contract includes a condition for the receipt by an employee of a benefit under the contract and the employer has the discretion, pursuant to the terms of the contract, to frustrate the satisfaction of that condition, it becomes even more important for that discretion to be exercised fairly, reasonably and not arbitrarily.

As a result, the Court found that the employer had breached its obligation to perform its contractual duties in good faith and found that the employee was entitled to long-term incentive plan payments that would have been paid over the reasonable notice period.

What this means for employers

Language contained in an employment agreement which requires the employee to be actively employed at the time a bonus payment is paid in order to be eligible for that payment can still be enforceable. The duty of good faith contractual performance, as applied to employment law by the Alberta Court of Queen’s Bench, may give employers reason to be cautious in how they proceed with the termination of employees with significant future bonus entitlements.