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‘Active employment’ requirement in bonus plan does not preclude bonus during notice period
September 12, 2016

Bonus plans are an effective way to recognize achievements and reward performance. However, a recent decision by Ontario’s Court of Appeal shows that without very careful drafting, they may be costly for employers when it comes time to terminate the contract of employment.

In November 2014, TeraGo Networks Inc. terminated Maurice Paquette’s employment without cause. After the parties were unable to agree on a severance package, Mr. Paquette sued for wrongful dismissal. The trial judge fixed the reasonable notice period at 17 months. Mr. Paquette was awarded damages based on the salary and benefits he would have received during that notice period with one notable exception– his claim for compensation for lost bonuses was denied on the basis that the bonus plan required him to be “actively employed” at the time the bonus was paid.

The sole issue on appeal was whether Mr. Paquette was entitled to compensation for bonuses during the notice period. In considering the appeal, the Ontario Court of Appeal set out the two-step test to apply in these circumstances:

  • [30] The first step is to consider the appellant’s common law rights. In the circumstances where, as here, there was a finding that the bonus was an integral part of the terminated employee’s compensation, Paquette would have been eligible to receive a bonus in February of 2015 and 2016, had he continued to be employed during the 17 month notice period.
  • [31] The second step is to determine whether there is something in the bonus plan that would specifically remove the appellant’s common law entitlement. The question is not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the appellant’s common law rights…

The Court held that the wording of the bonus plan did not remove Mr. Paquette’s right to receive compensation for both lost salary and bonus during the reasonable notice period. Accordingly, Mr. Paquette was awarded an additional $58,386.64, representing the loss of his bonus for 2014 and the lost opportunity to earn a bonus in 2015.

The case illustrates the value of obtaining legal advice before terminating an employee’s employment and of ensuring that limitations in bonus plans include carefully considered, unambiguously language.

Paquette v. TeraGo Networks Inc., 2016 ONCA 618

Questions about the content of this article may be directed to Richard Truman.