What Software Licences (and the Ontario Court of Appeal) Can Teach Us About Bonus Plans

I have a confession to make.

Even though, as a lawyer, I believe pretty strongly in reading things before I sign them, I don’t think I’ve ever read through the terms and conditions on a software license before clicking “accept”.

Most of us don’t. We assume the terms are standard and won’t significantly affect our rights. If there’s something out of the ordinary – if, for example, our clock might unexpectedly cost us $760,000 – we would expect the company to draw our attention to it specifically.

When that $760,000 term appears in an employee’s bonus plan, the Ontario Court of Appeal agrees.

In Dawe v. The Equitable Life Insurance Company of Canada, Michael Dawe, a senior vice president, was fired at age 62 after 37 years of service. At the time of his termination, Mr. Dawe was receiving a significant part of his compensation through short-term and long-term incentive plans. These bonus plans stated that if his employment was terminated without cause, he would only be paid pro-rated bonuses to the date of his termination and would not receive any bonus payments as part of a severance package. If not for that restriction, Mr. Dawe might be entitled to approximately $760,000 in bonuses over a 24-month termination notice period.

The Ontario Court of Appeal found that on their face, these termination provisions were enforceable. However, the provisions were never brought to Mr. Dawe’s attention. The bonus plans were available on the company’s Intranet, and he also received paper copies but, just like software licences, the bonus plans were complex and difficult to understand. The court held that an employee, even a senior vice president, cannot be assumed to have accepted every detail of a bonus plan. If the employer wanted Mr. Dawe to forfeit hundreds of thousands of dollars, it had to prove that Mr. Dawe actually knew about the relevant bonus plan terms. As a result, Mr. Dawe was awarded bonuses throughout his 24-month notice period.

Speaking of that 24-month notice period, the Court of Appeal’s decision did contain some welcome news for employers. The lower court judge had actually awarded Mr. Dawe 30 months, and we discussed that award in a recent blog post as part of a trend toward older, long-service employees receiving longer notice periods. However, when the appeal was decided (a few weeks after our blog post), Mr. Dawe’s notice period was reduced to 24 months. The Court of Appeal confirmed that notice periods in excess of 24 months should be awarded only in “exceptional circumstances” and no such circumstances existed in Mr. Dawe’s case.

Based on this decision, if you’re an employer, you may wish to not only add termination provisions to your bonus plans, but also to review how you communicate them to your employees. If you’re an employee, please read bonus plans before you accept them. They may contain terms that will be costly if your employment is terminated.