Double Check those Bonus Plans!

The Ontario Court of Appeal’s decision in the case of Paquette v. TeraGo Networks Inc. should have all employers running to double-check and possibly amend their bonus plans.  A further case released on the same day by the same panel of judges further confirmed the law set out in the Paquette decision.

Trevor Paquette had been employed by TeraGo Networks for approximately 14 years at the time of termination.  He brought a motion for summary judgment and his common law notice period was found to be 17 months.  The motions judge also determined that he was entitled to damages in lieu of his remuneration for the entire notice period, although he denied entitlement to damages in lieu of bonus entitlement over the notice period.  The matter proceeded to appeal solely on the basis of whether or not Paquette was entitled to damages in lieu of bonus during his 17 month notice period.

Paquette’s bonus plan stated that he had to be “actively employed” at the time the bonus was paid in order to receive same.  The Court of Appeal reviewed a number of similar bonus and stock option plan cases, and confirmed that the following is the state of the law in Ontario:

  • Subject to contractual terms, a terminated employee is entitled to compensation for all losses arising from the employer’s failure to give proper notice, and the damages award should place the employee in the same financial position he or she would have been in had such notice been given.  In Paquette’s case, since he would have earned a bonus had he been given working notice, the use of the words “active employment” could not be used as an end-run around his claim for the bonus over the pay in lieu of notice period.
  • The test to be followed is two-fold: (i) the first step is to determine an employee’s common law rights and whether a bonus forms an integral part of the employee’s compensation; and (ii) the second step is to determine whether there is something in the bonus plan that would specifically remove that common law entitlement.
  • An “active employment” requirement does not preclude the employee from receiving damages representing compensation for the bonuses which the employee would have received if employment had continued through the reasonable notice period.

The key for employers then, is to ensure that the language of any bonus plan is sufficiently clear that the common law entitlement to damages in lieu of bonus is expressly removed.  As every bonus plan is different and as the drafting of this sort of exclusionary language is obviously complex, legal advice should always be sought by employers when it comes to limitations set out in bonus plans.

The Court of Appeal’s decision in Paquette v. TeraGo Networks Inc. can be found here:  http://www.canlii.org/en/on/onca/doc/2016/2016onca618/2016onca618.html.

Catherine Coulter

About Catherine Coulter

Catherine Coulter (She/Her/Hers) practices employment and labour law as a member of the Litigation and Dispute Resolution group of Dentons’ Ottawa office. Although she principally represents and advises clients on employment and labour matters, she also acts in the fields of general commercial litigation, insurance litigation and privacy and data management.

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