Bonuses are useful to recruit, retain and reward employees, but they can present challenges, both legal and financial, when employees are terminated without cause. By default, a dismissed employee is entitled to the compensation and benefits that he or she would have earned during the termination notice period, including any bonuses that were an integral part of the employee's compensation package. In an effort to avoid having to pay anything more than base pay, employers often require that an employee be actively employed on the bonus payment date to be eligible to earn a bonus. However, as the Court of Appeal for Ontario recently confirmed in Paquette v. TeraGo Networks Inc. (PDF), "active employment" requirements are insufficient to remove or limit a dismissed employee's rights.

What Happened in This Case

Trevor Paquette was employed by TeraGo Networks for 14 years. He earned a base salary and was eligible for an annual bonus. The bonus plan required Paquette to be "actively employed" at the time the bonus was paid in order to receive it. In November 2014, Paquette was terminated without cause. The parties could not agree on a severance package and so Paquette sued TeraGo for wrongful dismissal.

The court decided Paquette was entitled to 17 months' notice of termination. The court awarded damages equal to the salary and benefits Paquette would have earned during that period but refused to award damages for the bonuses that Paquette would have earned during this same period. This was because the bonus plan required that Paquette be actively employed when the bonus was paid (typically, February of each year) and, as a result of the termination of his employment, he was not.

Paquette appealed the decision.

What the Court of Appeal Decided

The Ontario Court of Appeal affirmed the basic principle that wrongfully dismissed employees should be made whole. They should be compensated for all loses arising from the employer's failure to give proper notice of termination. These damages will usually include all compensation and benefits the employees would have earned during the reasonable notice period. This may include a bonus where the bonus is an integral part of the employees' compensation – regardless of whether it is described as a discretionary bonus.

Whereas the lower court focused its analysis on whether the "active employment" requirement in the bonus plan was ambiguous, the Court of Appeal ruled that it should have determined whether Paquette's legal rights upon termination were effectively limited by the "active employment" condition in the bonus plan.

As the Court of Appeal confirmed, the analysis is a two-part process. The first step is to determine if the bonus is an integral part of the employee's compensation package. If it is, the court should presume the employee's right to wrongful dismissal damages is based on the complete compensation package, bonuses included. Next, the court must consider whether the bonus plan unambiguously alters that right.

Bottom line: the question is not whether a bonus plan is ambiguous, but whether the wording of the plan unambiguously limits an employee's right to receive compensation for the loss of the opportunity to earn a bonus during the period of reasonable notice.

Ultimately, the Court of Appeal concluded that a requirement to be "actively employed", without more, is not sufficient to deprive an employee of a claim for the bonuses that he or she would have received had the employer provided notice of termination and allowed the employee to work throughout the applicable notice period. As a result, Paquette was awarded damages for the bonuses he would have earned during the 17 month notice period.

What You Should Take Away

The decision in Paquette v. TeraGo Networks Inc. should not be taken to mean that an employer cannot limit an employee's right to claim damages for the loss of bonuses the employee would have received during the notice period. Employers can exclude bonuses from severance packages and wrongful dismissal damages with careful drafting. As the financial implications are not trivial, employers should be proactive and review their individual employment agreements and bonus plans frequently. If they do not contain language that clearly displaces the presumption that damages are based on the complete compensation package, including bonuses, they should be amended.