Bonus Plans and Employment Terminations: The Supreme Court Weighs In

Let’s say you’re an employer and you want to offer your employees a bonus, as an incentive to produce great results for your organization. Since the whole point of the bonus is to generate these organizational results, you don’t want to pay it to someone who’s not working. Certainly, it’s pointless to give a bonus to someone whom you’ve already fired. But you know that terminated employees are normally entitled to have their bonuses continue during the common law notice period, as long as two years after the termination. Can you create a bonus plan that avoids this result?

This key question was raised in a recent decision of the Supreme Court of Canada, Matthews v. Ocean Nutrition Canada Ltd. The answer? You can, but the plan needs to clearly remove the employee’s common law right to have the bonus continue. As strong as your existing language seems, it might not be enough.

In Matthews, the employee had a bonus plan under which he would qualify for a substantial incentive payment upon a “realization event.” That event ended up happening 13 months after he left his job due to a constructive dismissal. A trial judge awarded him a 15-month common law notice period. Mr. Matthews argued that since the realization event happened during the notice period, he should still get his bonus.

The Supreme Court of Canada agreed. First, the court confirmed that terminated employees are entitled to be treated as if they had been given actual working notice of their termination. Had Mr. Matthews been given actual working notice 15 months in advance of the “termination” (in his case, a constructive dismissal), he would still have been an employee when the realization event occurred. Therefore, on its face, he is entitled to the bonus.

Furthermore, contrary to previous case law, the court held that it was not necessary for Mr. Matthews to prove that the bonus was “integral” to his compensation package, in order to be entitled to it. All he had to prove was that he would have earned the bonus had he worked through the notice period.

There is, however, an exception if the bonus plan unambiguously removes the employee’s regular common law right to the bonus. However, Mr. Matthews’ bonus plan failed to do so. Here are some of his bonus plan terms, and why they weren’t good enough to eliminate his right to the bonus:

• The plan said no bonus would be paid unless, on the date of the realization event, Mr. Matthews, “is a full time employee”. This doesn’t remove his entitlement, because he would have been a full-time employee at the relevant time had he worked through the notice period.
• The plan said that it, “shall be of no force and effect if [Mr. Matthews] ceases to be an employee …” This doesn’t remove his entitlement, because legally, since he has the right to work through the notice period, he doesn’t “cease to be an employee” until the notice period is over.
• The plan said that a bonus, “shall not be calculated … in any severance calculation”. This doesn’t remove his bonus entitlement, because the calculation of common law pay in lieu of notice is not a “severance calculation”, it is a calculation of what he would have earned had he worked through the notice period.

So, what language would remove an employee’s bonus entitlement? From the employer’s perspective, ideally the employment contract will include a termination clause that clearly eliminates common law notice altogether, bonuses included (although these clauses are also becoming more difficult to enforce). In the bonus plan itself, employers must be explicit that they are removing not only the bonus itself, but also the employee’s usual common law rights to receive bonuses during the notice period.

With many incentive plans issued annually, now is the perfect time for employers to review their plan language before new plans are issued for 2021.