Employers will sometimes include language such as the employee will only receive a bonus if he or she is employed on the date the bonus is paid out. Courts have shown some reluctance to enforce such arrangements.
The issue was recently considered in Jivraj v Strategic Maintenance Ltd, 2014 ABQB 463. The issues were:
- What is the period of reasonable notice;
- What, if any entitlement did the terminated employee have to a bonus, where the bonus was agreed to be paid out in instalments and (in 2011, 2012 and 2013)?;
- Did the employee meet his duty to mitigate?
Of relevance for this discussion is that the employee was terminated on March 9, 2012 (without just cause).
With respect to the bonus, the parties executed an Amending Agreement that purported to “amend the provisions dealing with his entitlement to a bonus”. Paragraph 5 of the Amending Agreement provided as follows:
Discretionary Bonus: There are two separate calculations to the Discretionary Bonus referred to herein. For the year ended 30 September, 2011, you have been awarded a bonus of $80,000.00, which is payable in three equal installments of $26,700.00. Each installment is payable on or before November 15th, in the years 2011, 2012 and 2013. As set out below in paragraph 8, in order to be entitled to receive the second and third installment of this initial bonus, you must remain in the employment of Strategic when each installment is due and payable.
Paragraph 8 provided as follows:
The Employee understands and agrees that all Bonus payments are conditional upon the Employee remaining in the employment of Strategic at the time any portion of the a Bonus is actually payable to the Employee, and if for whatever reason, the Employee ceases employment with Strategic, regardless of the circumstances, then no further Bonus amounts are payable to the Employee. [Emphasis added]
The original terms of employment provided that an employee would only be disentailed to a bonus where he resigned his employment prior to the payout date. The employer disagreed, stating that, from a prior experience, it wanted to remove all ambiguity regarding the payment of the bonus.
The Court, on the usual factors, determined that the period of reasonable notice at common law was 6 months and dismissed the plaintiff’s claim for “bad faith” discharge.
The Bonus and the Amending Agreement
The Court found that, on the language of the Amending Agreement, the plaintiff was not entitled to the 2012 and 2013 bonus installments. According to the Court:
I am of the view that clause 8 of the Amending Agreement clearly provides for precisely that effect. SML was not required to pay subsequent tranches if, for any reason, Mr. Jivraj was not employed with SML at the time they became payable. I do not accept Mr. Jivraj’s assertion that he understood he would receive subsequent tranches as long as his employment was not terminated of his own volition.
And, in welcome words in the current contract interpretational climate, the Court stated:
However unfair or one-sided it may seem in retrospect, SML and Mr. Jivraj agreed to an arrangement which required him to be reporting to work if he was to receive bonus installments. The cases set forth above make it very clear that parties may agree to forfeiture of accrued employment benefits, provided they do in clear, unambiguous language. This they did and Mr. Jivraj is obliged to abide by the terms of that agreement.
The plaintiff argued that, if he was entitled to a 6 months period of reasonable notice, that he, effectively remained an employee through that period and was entitled to whatever bonus was attributable to that period. The Court observed that the period of reasonable notice took him to September 30, 2012.
The Court disagreed, and disagreed that he was entitled to the 2012 bonus installment for the following three (3) reasons:
First, I have found above that a reasonable period of notice for Mr. Jivraj in these circumstances is six months. As Mr. Jivraj was terminated on March 9, 2012, the notice period expired on September 9, 2012. SML had until October 30, 2012 to decide what, if any, bonus would be awarded. It cannot be said with certainty that SML would have awarded any bonuses within Mr. Jivraj’s notice period.
Therefore, even if Mr. Jivraj is correct in his interpretation of Saalfeld, and I need not decide that point, treating him as an employee up to the end of his notice period does not assist him in this regard.
Second, Mr. Jivraj cannot credibly assert that he definitely would have been awarded a bonus had he been employed by SML on September 30, 2012. Clause 7 of the Amending Agreement makes clear that this bonus was in the “sole discretion” of SML. Mr. Jivraj cites cases in which the courts have found that the granting of bonuses was sufficiently habitual for employees to have a reasonable expectation that such bonuses would form part of their compensation. I am not satisfied that Mr. Jivraj had been employed with SML long enough to have such a reasonable expectation.
Third, clause 8 of the Amending Agreement would have applied to any such bonus, disentitling Mr. Jivraj to receipt thereof as he was no longer employed by SML at the time for payment. Mr. Jivraj may not have liked this clause, but I am satisfied that he understood its implications and he was prepared to accept it to gain, and retain, employment with SML.
The Court dismissed the bonus claim.
Some Lessons for Employers
There has been a real troubling trend in contractual interpretation of late. Courts will strike down contractual provisions, even on strained interpretations that are clearly contrary to the shared intentions of the parties, where they are given the opportunity. Sanctity of contract has given way, in many cases, to something in the nature of judicial activism. That’s fair game, and puts the onus on the employer to react to this by being extra careful and diligent in their drafting.
The take-away here is that, as the Court observed, Courts will be hard pressed to overturn the clear intentions of the parties are set out in a contract that is otherwise legally enforceable. Given the trend mentioned above, employer’s just need to be doubly cautious when entering into and drafting contracts. While it is never possible to guarantee a result (whenever you get in front of a third party decision maker, you take your chances), but tight language and proper execution can go a long way in having a case decided in the employer’s favour.