Quite often, when I am asked by a client to review a severance package, the entitlement to a bonus is an important factor.
In some cases, the employer historically pays a bonus, which varies in amount from year to year, but is entirely gratuitous with no connection whatsoever to the performance of the employee or the company as a whole. This kind of remuneration is not a contractual obligation but rather a payment made solely at the employer’s discretion as a show of gratitude for the employee’s efforts. In other cases, the bonus is considered a term of employment, a key component of the employee’s remuneration package, and generally tied to KPIs or “key performance indicators”. In such cases, the bonus or performance incentive is often coined as a “long term incentive payment” or LTIP.
Most of the time, the payment of the bonus is detailed in a written plan. However, the level of detail in a given bonus plan can vary from case to case. In some instances, the bonus plan simply spells out quantifiable targets to be met at specific times in order to trigger payment of the performance incentive. Other bonus plans can be much more detailed, involving complicated formulas that determine whether the target has been reached. These kinds of bonus plans regularly include a provision that stipulates that the employee must be “actively employed” at the time that the performance incentive is to be paid. This date is usually during the fiscal quarter following the target date.
The phrase, “actively employed”, has posed a problem for many employees who have been let go and offered a severance package. In many instances, the employee has met certain KPIs or targets but is no longer performing work for the company at the time that the bonus is paid. The notice of termination that the employee received from the employer is not working notice but rather pay in lieu of notice, so the employee is not actively working for the employer and therefore no longer entitled to the bonus – or so the employer would argue.
On occasion, the employer might include a provision in the severance package that even though the employee would not be actively employed on the date that the bonus would be paid, the employer offers to pay the bonus (or a pro-rated portion thereof) on a “gratuitous basis”. However, the Supreme Court of Canada’s decision in Matthews v. Ocean Nutrition Canada Ltd. clarified how such payments are not necessarily gratuitous, but actually a contractual obligation regardless of the language of the bonus plan.
In this case, the employee stood to receive a bonus of approximately $1 million if the employer company was sold. Unfortunately, a series of events occurred that led to a breakdown of the employment relationship and compelled the employee to quit.
Thereafter, the company was sold for over $500 million. The company took the position that because the employee resigned from his employment, he was no longer entitled to payment of the bonus.
The Supreme Court of Canada disagreed. Both the trial judge and the Court of Appeal concluded that the employee was constructively dismissed from his employment as a result of the company’s actions that compelled the employee to quit. More information on the law of constructive dismissal can be found here.
From this conclusion, the Supreme Court of Canada considered whether the employee was still entitled to his bonus even though he was not actively employed by the company at the time that the bonus was to be paid. The court set out a two-part test to determine whether damages for pay in lieu of notice should include payment of a bonus and other benefits:
- Would the employee have been entitled to the bonus or benefits as part of their compensation during the reasonable notice period?
- If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
Applying this test, the Supreme Court of Canada held that the employee was indeed entitled to payment of his bonus and stated the following:
“To this end, the provisions of the agreement must be absolutely clear and unambiguous. So, language requiring an employee to be “full-time” or “active”,… will not suffice to remove an employee’s common law right to damages. After all, had Mr. Matthews been given proper notice, he would have been “full-time” or “actively employed” throughout the reasonable notice period…”
The reasoning in this decision is very similar to a decision of the Court of Appeal from 2019. My article on that decision can be found here.
The takeaway from the Matthews decision stems from what the Supreme Court of Canada stated at paragraph 59:
“The purpose of damages in lieu of reasonable notice is to put the employee in the position they would have been in had they continued to work through to the end of the notice period.”
In other words, upon the termination of employment on a without cause basis, the employer is obligated to pay to the employee every aspect of the remuneration package that would have been received during the notice period, unless the terms of employment very clearly state otherwise.
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.