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Employers will need to revisit their termination clauses as well as stock option and bonus plan documentation given the Ontario Court of Appeal has clarified the circumstances under which an active employment clause can effectively be used to limit liability at the point of termination. In Paquette v. TeraGo Networks Inc. (2016), 34 C.C.E.L. (4th) 26, 28 C.C.P.B. (2nd) 1) (Ont. C.A.), the court succinctly summarized the guiding principles [at para. 47]:

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A term that requires active employment when the bonus is paid, without more, is not sufficient to deprive an employee terminated without reasonable notice of a claim for compensation for the bonus he or she would have received during the notice period, as part of his or her wrongful dismissal damages.

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Employment law is fluid in nature, and advising employers and employees on what aspects of compensation comprise one’s entitlements at the point of termination can change from year to year. The issue of limiting bonus and stock option entitlements during the common law notice period when an individual is no longer actively rendering service has been contentious, with a host of decisions on the subject over the past two decades. However, the Ontario Court of Appeal has sought to bring clarity to the issue of when an active employment clause might be used to lawfully deny certain compensation entitlements, including those relating to bonuses and stock options, during the reasonable notice period.

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The court simply held that the starting point is the presumption that an employee once dismissed without cause is entitled to all aspects of compensation over their common law notice period. Absent clear language rebutting that presumption in relation a bonus, the court will not deny an employee such compensation when it forms an integral part of their compensation.

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In finding that the trial judge, Perell J., had erred in principle, the Court of Appeal concluded [at paras. 16-18, citations omitted]:

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The basic principle in awarding damages for wrongful dismissal is that the terminated employee is entitled to compensation for all losses arising from the employer’s breach of contract in failing to give proper notice . . .

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Damages for wrongful dismissal may include an amount for a bonus the employee would have received had he continued in his employment during the notice period, or damages for the lost opportunity to earn a bonus. This is generally the case where the bonus is an integral part of the employee’s compensation package. This can be the case even where a bonus is described as “discretionary”.

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Where a bonus plan exists, its terms will often be important in determining the bonus component of a wrongful dismissal damages award. The plan may contain eligibility criteria and establish a formula for the calculation of the bonus. And, as here, the plan may contain limitations on or conditions for the payment of the bonus. To the extent that there are limitations, the question may arise as to whether they were brought to the attention of the affected employees, and formed part of their contract of employment.

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Therefore, the proper test is to consider the individual’s common law rights. In circumstances where there is a finding that the bonus is an integral part of the terminated employee’s compensation, determine whether there is something in the bonus plan that would specifically remove the appellant’s common law entitlement and determine the circumstances surrounding that contract being entered into. 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.

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With respect to the issue of entitlement and the condition that the employee be “actively employed”, the court further concluded [at paras. 24 and 42]:

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. . .The motion judge ought to have commenced his analysis from the premise that the appellant’s common law right to damages was based on his complete compensation package, including any bonus he would have received had his employment continued during the reasonable notice period, and then examined whether the bonus plan specifically limited or restricted that right.

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The approach in these cases can be summed up in the words of Goudge J.A. in Veer, at para. 14, “the parties must be taken to have intended that the triggering actions [for the cancellation of an employee’s stock option rights] would comply with the law in the absence of clear language to the contrary.”

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To bring further clarity to the issue, the court also analyzed the various cases that have been interpreted as applying different analyses to stock option versus bonus plan language. The court concluded [at para. 44]:

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I do not regard Kieran as requiring that a different or new test be applied to bonus cases. Lang J.A. explained, at para. 56, that the employee “would be entitled to damages for the loss of the plans, as they formed part of his compensation, absent contractual terms to the contrary.” Without deciding whether the test that applies in stock option cases is the same as that applicable in bonus cases, I note the similarity between the approach I have set out above and that of Lang J.A., as well as the tests adopted in other stock option cases.

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The same panel for the Court of Appeal released another decision on the same issue simultaneously. In Lin v. Ontario Teachers’ Pension Plan, 2016 CarswellOnt 12704, 2016 ONCA 619 (Ont. C.A.), the court held [at paras. 89 and 90]:

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I reject the appellant’s assertion that these terms restrict Lin’s entitlement to compensation for lost bonuses in the event of wrongful dismissal. The wording does not unambiguously alter or remove the respondent’s common law right to damages, which include compensation for the bonuses he would have received while employed and during the period of reasonable notice. A provision that no bonus is payable where employment is terminated by the employer prior to the payout of the bonus is, in effect, the same as a requirement of “active employment” at the date of bonus payout. Without more, such wording is insufficient to deprive a terminated employee of the bonus he or she would have earned during the period of reasonable notice, as a component of damages for wrongful dismissal . . .

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And, as Goudge J.A. explained in Veer v. Dover Corporation (Canada) Limited (1999), 45 C.C.E.L. (2d) 183 (Ont. C.A.), at para. 14:

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“[T]he termination contemplated must, I think, mean termination according to law. Absent express language providing for it, I cannot conclude that the parties intended that an unlawful termination would trigger the end of the employee’s option rights. The agreement should not be presumed to have provided for unlawful triggering events. Rather, the parties must be taken to have intended that the triggering actions would comply with the law in the absence of clear language to the contrary.”

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Conclusion

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The Court of Appeal has signalled that it will give the benefit of the doubt to employees. If the employer, with the perceived resources to draft employment contracts, fails to clearly exclude bonus, stock option and related benefits from the common law notice period, they will fail to rebut the presumption in favour of that entitlement. As such, employers are advised to constantly monitor the law as it relates to employment contracts and policy language and adapt accordingly in order to stand the test of time. This is precisely why specialized counsel dedicated to employment and labour law is essential.

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If you have a workplace issue relating to the enforceability of an employment contract, stock option plan, bonus plan or related contractual compensation language, call a Toronto employment lawyer and Toronto labour lawyer at Stitz Litigation. We are an employment and labour law firm in Toronto with over half a decade of winning experience. Call for a free case assessment.

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