The Ontario Court of Appeal released a decision in Paquette v. TeraGo Networks Inc., 2016 ONCA 618 (CanLII) that should have employers pulling out and reviewing their incentive plans, including bonus, STIP, LTIP, stock options and whatever else is contingent upon “active employment”.
The Ontario Court of Appeal reviewed a range of important employment law issues in Paquette. This was an appeal by Paquette of a summary judgment that denied him certain bonus payments through the common law period of reasonable notice.
Paquette worked for the TeraGo Networks Inc. from 2000 until his employment was terminated without cause in November 2014. At the time of dismissal, he was 49 years old and held the position of Director, Billing and Operations Support Services. His compensation was composed of a base salary and bonuses. He sued TeraGo for wrongful dismissal.
The motion judge fixed the reasonable notice period at 17 months in the circumstances (including the state of the economy in Alberta where he worked). Damages were calculated based on Paquette’s salary and benefits, but excluded any amount for the loss of his bonus through the reasonable notice period.
He appealed to the Court of Appeal who allowed the appeal. There is only one issue before the Court of Appeal — whether the motion judge erred in denying the Paquette’s claim for compensation for lost bonuses as part of his damages for wrongful dismissal, on the basis that the bonus plan required the bonus recipient to be "actively employed" at the time the bonus was paid.
Specifically, TeraGo’s bonus program or plan provided that an employee "actively employed by TeraGo on the date of the bonus payout" was eligible for a bonus based on his or her salary. An employee received a bonus if: (a) the employee met his or her personal objectives, determined by the manager and approved by a vice-president; and (b) TeraGo's performance met the corporate objectives set by its Compensation Committee.
The motion judge relied on the bonus plan's requirement that an employee had to be "actively employed" by TeraGo at the time the bonus was paid and declined to include any amount for the bonus in Paquette’s damages. The judge stated:
Paquette may be notionally an employee during the reasonable notice period; however, he will not be an 'active employee' and, therefore, he does not qualify for a bonus.
This is a common issue in wrongful dismissal cases where a bonus is an integral part of an employees’ compensation and the plan documents include exclusionary language such as in Paquette.
The correct way to look at this issue is to determine whether a terminated employees’ common law right to damages for “compensation and benefits that he would have earned during the reasonable notice period, including the bonus that was part of his compensation package” is “limited by the "active employment" condition in the bonus plan.”
The Court of Appeal made the following points that every employer should commit to memory (or at least have readily available):
- The basic principle in awarding damages for wrongful dismissal is that the terminated employee is entitled to compensation for all losses arising from the employer's breach of contract in failing to give proper notice. The damages award should place the employee in the same financial position he or she would have been in had such notice been given;
- In determining damages for wrongful dismissal, the default for most courts is to include all of the compensation and benefits that the employee would have earned during the notice period;
- This is not absolute. Where a bonus plan exists, its terms are generally important in determining whether a bonus should or should not be included in wrongful dismissal damages. As the Court of Appeal stated:
“…. the plan may contain eligibility criteria and establish a formula for the calculation of the bonus. And, as here, the plan may contain limitations on or conditions for the payment of the bonus. To the extent that there are limitations, the question may arise as to whether they were brought to the attention of the affected employees, and formed part of their contract of employment.”
But what is the proper approach in these case? The Court referred with approval to its earlier decision in Taggart v. Canada Life Assurance Company, 2006 CanLII 53345 (ON CA) (which dealt with damages for loss of a pension during the common law period of reasonable notice) as setting out the correct approach when looking at “active service”:
Assuming that the pension plans can be read as requiring active service as a prerequisite for the accrual of pension benefits, I find unpersuasive the argument that this precludes damages as compensation for lost pension benefits. This argument, it seems to me, ignores the legal nature of the respondent’s claim. The claim is not … for the [benefits] themselves. Rather, it is for common law contract damages as compensation for the [benefits] the [employee] would have earned had the [employer] not breached the contract of employment. The [employee] had the contractual right to work and to be paid his salary and receive benefits throughout the entire … notice period.
Total compensation is the rule. What would the employee have received during the common law period of reasonable notice had he or she continued to work through that period and not been terminated summarily, without notice?
Once you answer that, then you look at the plan documents and determine whether they unequivocally (and legally) provide an exception to the rule. In other words, as the Court said in Taggart, is there something “in the language of the ... contract between the parties that takes away or limits that common law right.”
In Taggart, the Court held that a provision in the plan requiring"active service" as a prerequisite for the accrual of pension benefits did not constitute such a limitation on the common law right to damages for the loss of pension through the common law notice period.
Other cases from the Court of Appeal have reached similar conclusions, for example, Schumacher v. Toronto-Dominion Bank, 1999 CanLII 3727 (ON CA) and Bernier v. Nygard International Partnership, 2013 ONCA 780 (CanLII). Lin v. Ontario Teachers' Pension Plan, 2016 ONCA 619 (CanLII), discussed above takes a similar approach. An even more recent case to consider the matter is Bain v UBS, 2016 ONSC 5362 (CanLII)
Although the Court of Appeal does not foreclose an employer and employee agreeing to a bonus plan that limits the employees’ common law right to have bonus compensation included in wrongful dismissal damages, the Court does make it clear that they must do so expressly and clearly.
These are tough cases for employers (and perhaps the results are surprising…. “doesn’t active employment mean that the employee must be employed to receive the payment?” the answer, according to these cases, provides no comfort to employers).