Here’s a bonus: you’re fired! Tips for avoiding liability for lost bonuses to terminated employees

There are many reasons to have an employee bonus plan. The prospect of bonuses can motivate performance, attract top talent and assist in the retention of valuable employees. However, it is also a fact of life for every business that, from time to time, it must dismiss employees for any number of reasons. Losing one’s job is almost never a positive experience, and it is commonplace for a disgruntled ex-employee to seek payment of bonuses lost as a result of their termination. On the other hand, most organizations feel there is little benefit to paying a bonus to a departed employee.

Canadian law mandates that when an employee is dismissed without cause, he or she must be provided with notice of his or her dismissal. The amount of notice may be prescribed by a written contract (and cannot be less than the amounts set out in the Employment Standards Act) or, if there is no express term, it will be set with reference to the common law of “reasonable” notice. Reasonable notice can extend anywhere up to 24 months (in rare cases, even a little more) for long-service employees. Employees are entitled to the benefit of all of their remuneration during this period, meaning, as a general rule, they are entitled to bonuses. This can include discretionary bonuses included as an “integral part” of their remuneration.

There are ways that a business can protect itself from a claim for lost bonuses by a departed employee, but it can be tricky. For example, the Court of Appeal for Ontario recently held that a limit on payment of bonuses to employees engaged in “active employment” was insufficient to remove the obligation to pay bonuses during a period of notice. In this case, that meant that the employer was on the hook for almost $60,000 in bonus payments.

There are certainly better avenues for an organization to direct its resources. Happily, there are ways to defend against this kind of liability.

The starting point of the analysis will always be the written contract (if there is one) or the applicable bonus policy (if it exists in written form). Assuming there is a properly implemented and valid written document, the best practice is to make sure that the employee’s entitlements on termination are spelled out in clear language, and that it is also made clear that any bonus entitlement ends as of the date the employee stops working, whether or not the employee is entitled to notice beyond this as a result of the termination.

It may even be advisable to be repetitive: in early 2017, the Court of Appeal of Alberta considered a case in which a court had ordered the award of $440,000 to a departed employee. The policy at issue outlined in six places that bonuses would not be paid during a notice period, but included one permissive phrase to the effect that the entitlement to bonuses “may be” terminated on dismissal. The trial court found that the permissive phrase required the employer to make a discretionary decision, and further that the law required this decision to be made in good faith. Since the employer had not provided any reason for the employee’s dismissal, the trial court determined it was “not fair” for the employee to be denied the bonus he had worked for over several years. The Court of Appeal ultimately overturned this decision, finding that the fairness of the policy was not something that ought to have been considered in the face of clear contractual language. The court emphasized the importance of the six places in which the policy stated that bonuses would not be paid during a notice period. In those circumstances, the employer did not need to provide any reason for the dismissal or denial of bonus payments and could freely exercise the rights it had expressly contracted for.

The moral is that an ounce of preparation is worth a pound of cure – that implementing valid written instruments outlining in unambiguous, emphatic and even repetitive language that an employee will not receive bonus payments during a period of notice can save your organization from a claim for them. 

Cameron Wardell is a lawyer with Mathews, Dinsdale & Clark LLP, Canada’s only labour and employment law firm with offices coast to coast.