Are bonuses considered part of compensation for the purpose of calculating severance?

Written by on May 2, 2017 in Blog, Focus on Canadian Cases
Signing a contract

When does a bonus form part of compensation owed during a terminated employee’s notice period? In Paquette v. TeraGo Networks Inc., 2016 ONCA 618, the Ontario Court of Appeal held that notional bonus entitlements will be part of compensation in lieu of reasonable notice unless a contract unambiguously provides otherwise.

Trevor Paquette worked for TeraGo Networks Inc. from 2000 until his employment was terminated without cause in November 2014. At the time of his dismissal, Paquette was working as Director of Billing and Operations Support Services and earned a base salary and bonuses. When the parties were unable to agree on a severance package, Paquette sued for wrongful dismissal.

On Paquette’s summary judgment motion, the motion judge fixed the reasonable notice period at seventeen months and awarded damages based on the salary and benefits that he would have received during the notice period. The motion judge denied Paquette’s claim for compensation for lost bonuses, however, on the basis that the bonus plan required the recipient to be “actively employed” at the time the bonus was paid.

The Court of Appeal allowed Paquette’s appeal, holding that the “active employment” obligation did not exclude compensation for bonuses to which he would have been entitled during the reasonable notice period.

The Court emphasized the fundamental principle in awarding damages for wrongful dismissal: the terminated employee is entitled to compensation for all losses arising from the employer’s breach of contract in failing to provide notice. Accordingly, damages will include an amount for a bonus that would have been received during the reasonable notice period where the bonus is an integral part of the employee’s compensation package.

The Court noted that had Paquette received reasonable notice of seventeen months, he would have been “actively employed” when the company’s bonuses were paid. The key issue was therefore not whether Paquette was actively employed at the time of the bonus payment, but what compensation he would have been entitled to but for the wrongful termination. The Court found that the motion judge erred by examining the bonus provision on its own instead of approaching the analysis from the premise that Paquette was entitled to his full compensation package during the notice period. Rather than examining whether or not the bonus plan was ambiguous, he ought to have considered whether the plan’s wording unambiguously altered or removed Paquette’s common law rights.

The Court concluded that Paquette was entitled to additional damages for wrongful dismissal equal to the bonuses he would have earned during the seventeen months following his termination.

Employers often attempt to exclude bonuses from compensation awarded in lieu of notice. For those who seek to do so, Paquette serves as a warning to use clear and unambiguous language when limiting an employee’s common law entitlements. The Court of Appeal’s decision suggests that in order to oust an employee’s entitlement to bonuses during the notice period, the terms of the bonus agreement must unambiguously alter or remove the employee’s common law right to damages, which include compensation for the bonuses that would have been received while employed and during the reasonable notice period.

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