Employers who include discretionary bonuses as part of their employees’ compensation packages should be aware of the Ontario Court of Appeal’s latest guidance on (i) bonus entitlement for the period up to dismissal and (ii) compensation for the loss of a bonus during the reasonable notice period. This guidance came in the Court’s decision, issued last week, in Singer v. Nordstrong Equipment Limited, 2018 ONCA 364. Our analysis of the lower court’s decision in this case can be found here.
Period up to dismissal
Employers need to follow a fair, identifiable process when deciding to deny or grant a discretionary bonus for the period up to an employee’s dismissal. Employers should be sure to document performance issues or any other issues that may influence bonus eligibility under applicable bonus policies or employment contracts. See our other recommendations here regarding bonus policies.
Reasonable notice period
A dismissed employee may be entitled to compensation for the loss of a bonus during the reasonable notice period. To avoid this result on a go-forward basis, the employer can consider structuring compensation packages for new hires such that the bonus is not an integral part of compensation. Where it can be argued that a bonus is not an integral part of the employee’s compensation, the employer would have a stronger claim that the employee is not entitled to the bonus during the reasonable notice period. However, changes to compensation for existing employees need to be approached with caution, as they can constitute constructive dismissal.
As another proactive measure, employers should clearly specify in the bonus plan that employees will have no entitlement to a bonus during a period of reasonable notice. The language used to negate the bonus entitlement must be clear and unambiguous. It is also prudent to include such limiting language in employment agreements for new hires. For existing employees, the employer needs to consider whether negating bonus entitlement during the notice period constitutes a change for which new consideration would be needed in order for the change to be enforceable.
Legal advice should be sought where there is any uncertainty as to the suitability of the limiting language being used or the enforceability of any new provisions.
The relevant facts in Singer are outlined here. The Court of Appeal’s decision is instructive to employers for two reasons. First, the Court affirmed the lower court’s award of a discretionary bonus to a dismissed employee for his last year of work. The motion judge had held that despite the discretionary nature of the bonus, a “fair, identifiable process” must be followed in determining whether to award the bonus. The Court dismissed the employer’s cross-appeal on this issue because it failed to identify any error in the motion judge’s reasoning.
Second, on the issue of the employee’s entitlement to a bonus during the reasonable notice period, the Court found that the motion judge had erred in law by failing to apply the test articulated in Pacquette v. TeraGo Networks Inc., 2016 ONCA 618 (Pacquette). In Pacquette, the Court set out a two-part test for determining whether an employee is entitled to compensatory damages for the loss of a bonus during the reasonable notice period:
- Was the bonus an integral part of the employee’s compensation package, thereby triggering a common law entitlement to damages in lieu of bonus?
- If so, is there any language in the bonus plan that would restrict the employee’s common law entitlement to damages in lieu of a bonus over the reasonable notice period?
Applying this test, the Court found that Mr. Singer had established that his bonus was an integral part of his compensation package. The Court also found that Mr. Singer may have known that it was the company’s policy to not pay a bonus to an employee after their employment was terminated, but the company did not write this into the document that governed the bonus payment scheme. The Court accordingly concluded that Mr. Singer’s wrongful dismissal damages included compensation for the loss of his bonus during the 17-month reasonable notice period, reversing the motion judge’s ruling on this issue. An award of CAD 166,945 was calculated based on the average monthly value of his bonuses over the two years preceding dismissal, pro-rated over the 17-month period.