Bonuses: Do you know what you are entitled to when you are let go from your job?

When an individual’s employment is terminated, even though he has not done anything to warrant termination (i.e. dismissal without cause), the employee is entitled to reasonable notice – working notice, pay in lieu thereof, or a combination of the two. During the notice period, the employee is entitled to receive compensation for every aspect of his remuneration package. From time to time, however, some employers forget this very important point.

This means that the employee should receive not just payment of wages or salary, but also group medical benefits, employer contributions to a pension, car allowance, and anything else specified by the terms of the employment agreement. In fact, the Court of Appeal has previously held that an employer may be liable for the long term disability benefits that the employee would have otherwise received to age 65 had the employer not discontinued coverage. A link to that very interesting decision may be found here.

With regard to bonuses, some employers feel that employees are not entitled to a prorated payment upon dismissal without cause. They argue that bonuses are discretionary in nature. Therefore, the employer is entitled to choose not to pay out a bonus to a dismissed employee. Recently, the Court of Appeal tackled this very issue.

In Paquette v. TeraGo Networks Inc., the employer argued that the employee was not entitled to a bonus payout (even though payment was based on achievement of personal objectives) on the basis that he was not actively employed as of the date of the bonus payout. With bonuses that are not tied to the employee’s performance, the employer maintains discretion as to whether or not a bonus is paid out year-to-year. With bonuses based on employee performance, many employers stipulate as a term of the employment agreement that the employee must be employed as of the predetermined date(s) of the bonus payout. They do this to avoid paying out a performance-related bonus to a dismissed employee.

The Court of Appeal however has held that an employee has a right to compensation “based on his complete compensation package, including any bonus he would have received had his employment continue during the reasonable notice period.” The court qualified this statement by stipulating that the bonus plan must specifically limit or restrict that right.

In other words, in order for an employer to rely upon an “active employment” clause, clear language is required in the employment agreement. Any ambiguity in the language would work to the detriment of the party drafting the employment agreement, typically the employer. The court also followed one of its prior decisions which emphasized that a limiting or restricting clause should not only be clear and unambiguous, but also be communicated to and brought to the attention of the employee.

What this decision underscores is not only the importance of careful drafting of the employment agreement by the employer, but also the need for employees to have their employment agreements reviewed prior to signing and negotiated with the assistance of knowledgeable employment law counsel.

This article is intended only to provide general information and does not constitute legal advice. Should you require advice specific to your situation, please feel free to contact me to discuss the matter further.