Northern Exposure

Incentive plan entitlements on wrongful dismissal

By Richard E. Johnston

In Canada, the wording of incentive plans can have a significant impact on the payments required on termination without cause. This point was highlighted by three Ontario decisions earlier this year.

In Ontario, if bonuses or amounts under incentive plans are an integral part of an employee’s compensation, then on termination without cause or reasonable notice, the employee is entitled to damages for loss of those amounts, absent contractual terms to the contrary. In the presence of contrary contractual terms, the plan terms govern.

Courts sometimes struggle with loss of a substantial bonus payment but are prepared to enforce clear terms of an employment contract or incentive plan to which the employee has agreed. However, Canadian courts will scrutinize the exact wording of such terms in assessing damages for wrongful dismissal, and ambiguous provisions won’t be enforced.

To be clear and unambiguous, an incentive plan must expressly address payment or forfeiture in the event of termination without cause, indicating whether plan entitlements arise with respect to a period for which payment is made in lieu of notice or at least that portion in excess of the minimum statutory notice period. Ideally, a written acknowledgment of the terms of the plan will be obtained from each employee.

In Paquette v. TeraGo Networks Inc., the employee had received annual bonuses for each of the four most recent years of employment, ranging from 6 percent to 25 percent of base salary. The court held that the employee was entitled to 17 months’ notice of termination.

Although that notice period would have included two bonus payment dates, the court did not include any amount in the damages for wrongful dismissal on account of bonus because the bonus program stated that an employee must be “actively employed” by the employer on the date of the bonus payment. However, in light of other Ontario decisions, employers should not interpret this decision as assurance that such wording will always achieve the same result. A notice of appeal has been filed in this case, and in the other two cases referred to below.

In Lin v. OTPPB, the employee accrued bonuses under both an annual incentive plan (AIP), determined and paid annually, and a long-term incentive plan (LTIP), also determined annually but paid in four annual statements. The court awarded damages of over $1 million on account of bonus payments to which the employee would have become entitled under the AIP and the LTIP during the notice period, but it did not include the amounts that would have become payable only under the LTIP after the expiration of the notice period.

The court considered several purported amendments to the AIP and LTIP that had been unilaterally implemented by the employer. While some of the amendments were accepted by the court in light of prior history of the plans, the amendments regarding forfeiture on termination without cause were not accepted since the terminated employee and most other affected employees had declined to sign a consent to those amendments when requested by the employer.

In Kielb v. National Money Mart Company, the employment agreement limited the employee’s right to pay in lieu of notice on termination without cause and provided an express waiver of any right to a bonus that “would ordinarily be paid after the expiration of the statutory notice period.”

The court held that, although the bonus was an integral part of the compensation package, the employee was not entitled to payment on account of a bonus in light of the terms of the employment agreement.

Canadian employers are advised to review relevant plan terms and seek legal advice to determine whether payments under the relevant plans are owed upon termination without cause.