In the case of Andros v. Collier Macaulay Nicolls Inc., the Ontario Court of appeal found that a failsafe provision meant to limit a terminated employee’s bonus entitlement was not enforceable. The employee received his annual bond despite limitations in the contract. This shows that employees may have a right to get bonuses during their notice periods. In this post, we will discuss the validity of contractual provisions limiting entitlements to bonuses on termination in the light of the recent Ontario Court of Appeal decision.
Employees’ Entitlements on Termination and Limitations
Employees terminated without cause are entitled to notice upon termination or pay in lieu thereof. Compensation during a notice period includes salary and continuation of benefits. All forms of benefits must continue including, but not limited to health, pensions matching, and annual bonuses.
Employers can limit the ability to claim wrongful dismissal damages through termination clauses found in an employment contract, provided that it is not less than the ESA and unambiguous.
Andros: No Discretionary Bonus on Termination?
On January 19, 2017, Mr. Andros was terminated without cause by his employer, a large commercial real estate company, Collier Macaulay Nicolls Inc. (“Collier”). The Company relied on the termination clause in Mr. Andros’ employment contract to pay him out the minimum statutory amounts for pay in lieu of notice and severance pay. Mr. Andros was also compensated for his benefits, including his annual bonus for 2016, but not 2017.
Mr. Andros brought a wrongful dismissal claim and motion for summary judgment against Collier seeking damages for reasonable notice under common law; benefits during the notice period; and his expected annual bonus including his pro rata share for 2017 and during his notice period.
Mr. Andros argued that the termination clause in his employment contract was unenforceable for contracting out of the ESA. Collier opposed, stating that the termination clause provides the statutory minimum entitlements and the bonus was discretionary. Further, Collier argued that Mr. Andros was ineligible because he must be an employee “in good standing” at the time the bonus was paid out.
The Failsafe Clause
The termination clause included a failsafe provision that states that an employee will receive at least what s/he is entitled to under the ESA, regardless of the terms of the clause.
The relevant clause read as follows:
The company may terminate the employment of the Managing Director by providing the Managing Director the greater of the Managing Director’s entitlement pursuant to the Ontario Employment Standards Act or, at the Company’s sole discretion, either of the following:
a) Two (2) months working notice, in which case the Managing Director will continue to perform all of his duties and his compensation and benefits will remain unchanged during the working notice period.
b) Payment in lieu of notice in the amount equivalent of two (2) months Base Salary. [Emphasis added.]
Courts Decide in Favour of the Employee
The first level judge found that the failsafe provision was unenforceable because it was ambiguous. The judge found that the termination clause was open to multiple interpretations. The judge found that the termination provision was not explicit. Mr. Andros would not have known, with certainty, when he signed the employment agreement whether he would be paid severance (if he were so entitled) in accordance with clause a, or whether he would be entitled to employee benefits in accordance with clause b.
The Court of Appeal agreed with the first level judge’s determination that the annual bonus was non-discretionary and integral to Mr. Andros’ compensation. The Court of Appeal found no error with the motion judge’s interpretation of the termination clause, reading the subsections separately rather than as a whole. The motion judge determined that the termination clause could reduce Mr. Andros’ entitlement to less than what he would receive under the ESA. Since the termination clause was unenforceable, Mr. Andros was entitled to common law.
Amount of Damages Owed: 8 months’ notice including the bonus entitlement
Mr. Andros was awarded 8 months’ notice for making reasonable efforts to mitigate his damages and his pro-rated share of the annual bonus for 2017, continuing during the notice period. The 2017 bonus was calculated as the average bonus of the past three years, 2014, 2015, 2016.
In regard to annual bonuses, the Court of Appeal adopted the motion judge’s approach, using the two-step approach established in Paquette v. TeraGo Networks Inc:
1. Determination of an employee’s common law rights and whether the bonus is an integral part of compensation. If so, the employee is entitled to bonus arising during the notice period; and
2. Determination of an employee’s contract or language of bonus plans and whether it removes the employees’ common law entitlements. The language must unambiguously alter the employee’s common law right.
In Andros, both levels of Court found that the requirement to be in “good standing” for the bonus payout was ambiguous and unenforceable. As a result, the employee was entitled to his prorated bonus.
Monkhouse Law is an employment law firm that has successfully fought out in court annual bonus cases for terminated employees, such as Paquette v. TeraGo Networks Inc. Failsafe provisions require careful drafting to be enforceable.
Give us a call if you have questions regarding your bonus entitlements upon termination. We offer a free 30 minute phone consultation. Contact us at 416-907-9249 or fill out the quick form below.