The Contractual Requirement of “Active Service” Does Not Alter or Remove An Employee’s Right to Compensation for Bonus Payments During The Reasonable Notice Period.

The Ontario Court of Appeal recently confirmed that the contractual requirement for employees to be “actively employed” to receive their regular bonus payments or other employment benefits is not enough to displace an employee’s right to common law damages for breach of contract in wrongful termination cases.

In Paquette v TeraGo Networks, 2016 ONCA 618 the Court made clear that in the calculation of common law damages only contractual language that unambiguously alters or removes an employee’s common law rights may be sufficient to exclude compensation for an employee’s bonus.

Mr. Paquette was terminated from his employment with TeraGO Networks.  On a summary judgment motion, the court denied Mr. Paquette compensation for lost bonuses as part of his common law damages on the basis that his employer’s bonus plan required employees to be “actively employed” at the time the bonus was to be paid (see Paquette v TeraGo,2015 ONSC 4189 at paragraph 64).

On appeal from the summary judgment motion, the Court of Appeal concluded that the proper way to analyze a claim for common law damages in a wrongful termination suit is to first consider the damages suffered by the employee based on their complete compensation package, including bonus payments and any other benefits, and then to consider whether the terms of any contract alters or excludes the employee’s common law rights.

Of most significance in the Paquette decision is the Court of Appeal’s clear statement that “[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.”

Relying on its decision in Kieran v Ingram Micro Inc (2004), 33 CCEL (3d) 157 (ONCA), the Court of Appeal gives further guidance as to the type of language that may displace an employee’s right to full compensation.

In Kieran, the issue was whether a terminated employee was entitled to an extension of time equal to the reasonable notice period to exercise his stock options.  The plan in question required employees to exercise their stock options within 60 days from the termination of employment. The Court of Appeal determined that this language was sufficient to remove the employee’s entitlement under the common law, because the plan defined “Termination of employment” as “the date the employee ‘ceases to perform services for’ the employer ‘without regard to whether the employee continues thereafter to receive any compensatory payments therefrom or is paid salary thereby in lieu of notice of termination.’”

In Paquette, the Court of Appeal does not resile from its decision in Kieran, indicating that similar language in an employee bonus plan may be sufficient to displace the employee’s common law right to compensation for a bonus that would have otherwise received during the reasonable notice period.  It is of note, however, that the Court explicitly declines to decide whether the test that applies to stock options is the same as that which applies to bonuses.

Prior to Paquette, the case law was mixed as to the contractual language that would effectively exclude bonus payments during reasonable notice period.  Many employees are likely under the mistaken belief that due to the language contained in their employee benefit plans, they are not entitled to compensation for bonus or other benefit payments that would have been received during the reasonable notice period.  Terminated employees should, therefore, always seek legal advice to confirm their rights to notice or compensation in lieu thereof.

Similarly, employers should always consult a lawyer in drafting their employment agreements and related policies.  In the wake of Paquette, there are likely a significant number of employers who still believe themselves to be protected by the “actively employed” language in their bonus or benefit plans, which the Court of Appeal has now determined to be insufficient.

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