Northern Exposure

Bonuses may be part of equation when calculating pay in lieu of notice

By Myriam Robichaud

Most employers in Canada understand that when terminating an employee, reasonable notice of termination or pay in lieu of notice must be provided. While this principle appears simple, determining which elements of compensation must be included in pay in lieu of notice can be complicated.

In Melanson v. Groupe Cantrex Nationwide the Superior Court of Quebec reminds us that pay in lieu of notice includes elements beyond base salary and may include bonuses.

Facts

In the fall of 2012, Cantrex terminated the employment of Mr. Melanson in a restructuring. He had worked for the company since 2000 and was a vice president. The company offered him a separation package of 12 months of base salary and limited health benefits in exchange for a release.

Melanson refused the offer. In a wrongful dismissal action, he claimed, among other things, an 18-month notice period including bonus.

Decision

The court awarded Melanson 15 months of notice based on his 12 years of service, age (57), exemplary employee record, duties, the scarcity of jobs in his field, and the steps he had taken to find a job.

The court emphasized that pay in lieu of notice must include all elements of an employee’s remuneration and ordered the company to pay the value of insurance, car allowance, and pension plan during the notice period.

The court also held that Melanson was entitled to a bonus during the notice period. To determine the amount of the bonus, his bonuses for the past five years were averaged. While noting that courts often do not include entirely discretionary bonuses in severance pay calculations, bonuses that are an integral part of an employee’s remuneration will be included.

In this case, Melanson had received a bonus in every year but one. The court found that the bonus was not entirely discretionary because it was based on the performance of the company and of the employee’s division, and a bonus target tied to salary was provided.

Cantrex argued that no bonus was owed because the bonus policy provided that employees must be working at the time a bonus is paid. The court rejected this argument and relied on an article of the Civil Code of Québec to find that Melanson had not waived his right to a bonus even though he knew about the policy and had applied it to subordinates.

Takeaway for employers in Canada

This case is a reminder that pay in lieu of notice often includes more than base salary. When evaluating whether a bonus should be included in pay in lieu of notice, relevant questions include:

  • Is the bonus entirely discretionary?
  • Have bonuses been regularly paid in the past such that they may be considered an integral part of an employee’s remuneration?
  • Are there criteria that determine whether a bonus will be awarded, such as the company or the employee achieving performance goals?
  • What are the terms of a bonus plan or policy governing the bonus? While in this case the court applied a section of the Civil Code of Québec, courts in all provinces will scrutinize plan terms dealing with bonus eligibility.