Terminated Employees Are Entitled to Pro-Rated Bonuses for Their Entire Notice Period

Terminated employees are entitled to receive a pro-rated bonus payment even when the bonus payout day falls outside their notice period. Only clear and unambiguous contractual language can alter or remove this common law right.

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Legal disputes regarding employee bonus entitlements after termination are a mainstay of employment law litigation in Ontario. I have previously written about the issue here and here.

Employees dismissed without notice are entitled to be paid the compensation they would have earned had they worked through the notional “notice period” which the employer ought to have given as actual advanced notice. This pay-in-lieu of notice includes bonuses which are an integral part of an employee’s remuneration.

Pro-rated Bonuses

Recently, the Court of Appeal released a decision directly addressing a point about bonus entitlements which prior cases left uncertain.

Employer bonus plans often have bonus payout dates which follow sometime after the work-period for which the bonus is earned. The prior case law was unclear about whether an employee can only obtain compensation for bonuses with payout dates that fall within the notice period or whether the employee can obtain a pro-rated bonus for the entire notice period even if the payout date falls outside of the notice period.

The Court of Appeal has now unequivocally clarified that the employee’s basic entitlement is for a pro-rated bonus payment for the entire notice period. Only clear and unambiguous contractual language can alter or remove this common law right.

Clear and Unambiguous Contractual Language

Of course, what constitutes “clear and unambiguous” language will remain a point of contention from case to case.

I have previously written about some of the conflicting guidance found in prior Court of Appeal cases. Another recent decision from the Court of Appeal highlights how this debate is likely to rage on.

In Manastersky, the three-judge panel was split on whether the employment contract used sufficiently clear language to eliminate the employee’s entitlement to payments related to an “incentive plan.”

The incentive plan created a particular investment fund out of which employees would receive payments once the fund matured. Once the fund matured and that investment period ended, the incentive plan contained language granting the employer a discretion to start another fund with a further investment period or to choose not to have any fund at all under that incentive plan.

The employee was terminated without notice shortly after the first investment fund matured. The employer never created another investment fund and therefore argued the employee would not have earned any incentive plan payments during the notice period.

The majority of judges at the Court of Appeal agreed with the employer that the contractual language permitting the employer to end the incentive plan was sufficiently clear to eliminate the employee’s entitlement.

On the other hand, the minority judge agreed with the trial judge that the language was not sufficiently clear. At best, the language permitted the employer to end that particular incentive plan, but it did not clearly remove the employee’s right to some other form of comparable incentive pay in its place.

At the time of writing, Manastersky is currently seeking leave to appeal to the Supreme Court of Canada. If leave is granted, the Supreme Court may provide some further direction regarding the “clear and unambiguous” contractual language requirement.


 

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