Termination Without Cause vs. Termination for Just Cause
In Ontario, whether an employee is entitled to any compensation when their job is terminated depends on the manner in which it occurs. Specifically, employment can be terminated “without cause” or for “just cause”.
If an employee’s job is terminated without cause and they have not signed a valid termination clause in an employment contract, the employee would generally be entitled to minimum period of notice (or payment in lieu of notice) as set out in the Ontario Employment Standards Act.
On the other hand, if there is not employment contract with a terminating clause limiting an employee’s termination entitlements (or if the termination clause is legally unenforceable, such as by not complying with the minimum statuary requirements), the employee is entitled to prior reasonable notice of termination (or pay in lieu of notice) under common law, which is typically far greater than the minimum statutory requirements, and is determined by courts considering the following factors:
- employee’s years of service working for the company
- employee’s age at time of termination
- employee’s character of employment
- availability of similar employment taking into account the employee’s qualifications and current economic circumstances
Bonus Pay when an Employee is Terminated
In situations where an employee receives a severance package that includes pay in lieu of notice (i.e., compensation), as opposed to working notice, the employee is generally entitled to be paid all of the compensation they would have earned had they continued working for the employer. For example, if a 52-year old employee is terminated without cause after 12 years of service as a General Manager (and assuming there is no employment contract limiting her termination entitlements), she would likely be entitled to a severance package consisting of 12 months of pay in lieu of notice paying all of her regular income and benefits, such as:
- base salary, wages or commissions
- health benefits
- pension benefits (including a defined contribution pension plan, defined benefit pension plan, Group RRSP)
- bonus pay
- stock options (RSU’s, PSU’s, etc.)
For employments lawyers in Ontario, it is not uncommon to confront employers unwilling to provide employee’s with all of their severance package compensation entitlements, especially bonus pay. Of course, the purpose behind paying bonus is a means of rewarding an employee for their individuals contributions to the business’s success over the past fiscal year.
Unfortunately, in a typical wrongful dismissal case or severance package negotiation with an employment lawyer, bonus pay is a sticky issue. In some cases, employers refuse to include an employee’s bonus pay in a severance package for good reason: they have a robust bonus plan in place that includes a section forfeiting (giving up) an employee’s right to receive bonus pay.
However, for the most part, employers often refuse to discuss bonus pay without a good reason. In other words, even when they have no bonus plan in place justifying their decision to not include bonus pay (or the one in place does not included language that complies with the law), it is often a thorny issue to deal with for employment lawyers negotiating a severance package or pursuing a wrongful dismissal claim. In fact, employers will usually rely on the fact that they consider bonus pay to be “discretionary” (i.e., not required but simply based on the company’s voluntary decision).
Fortunately, a recent Ontario court decision makes it clear to employers that even when you consider to bonus pay to be “discretionary”, you will still have a legal obligation to make the decision fairly, honestly and reasonably and be able to justify any calculations on an objective basis.
Bowen v. JC Clark Ltd., 2022 ONCA 614
Facts
The employees had worked for a hedge fund as portfolio managers for less than two years (December 3, 2012 to July 16, 2014), when their employment was terminated without cause. At that time, the employer provided each of them with 2 weeks’ salary plus $577 in lieu of notice. Believing they were wrongfully dismissed, they commenced an action against the employer seeking, among other things, bonus pay that they claimed they were owed as a term of their employment for the part of the fiscal year that they worked before their termination.
After their wrongful dismissal claims were dismissed at the original trial, they appealed and were successful. The main issue was whether or not the following section of their employment contract took away their right to bonus pay:
“At the total discretion of the Company, you may be eligible for a bonus at the end of each fiscal year depending on factors that include your personal performance and the profitability of the Company.“
Decision
The employer argued that the discretionary nature of the bonus provision in paragraph 5 of the employment agreements means that the employer was entirely unconstrained as to how that discretion was exercised, which the court rejected. It held that even: “where an employment agreement provides for a discretionary bonus, there is an implied term that the discretion will be exercised in a fair and reasonable manner”.
Therefore, even if there is a bonus plan in placing stating payment is at the employer’s discretion, the courts will always determine if the company acted fairly and reasonably in its decision to award bonus:
“The issue then is whether a fair and reasonable exercise of the discretion provided for in paragraph 5 of the employment agreements would result in the appellants being awarded a discretionary bonus for the period they worked in 2014 plus the two-week notice period, and, if so, the quantum.”
In finding that the employer did not exercise its discretion appropriately in declining to award the wrongfully dismissed employees’ bonus pay in their severance package, the court noted the following:
“The allocation of bonuses to employees was, as Stewart phrased it, “purely subjective”; the allocation was discretionary, and no calculations were involved. I note that, to the extent that this evidence asserted an unconstrained discretion on the respondent with respect to awarding bonuses, it is inconsistent with the obligation to exercise that discretion in a fair and reasonable manner.”
The Court also rejected the employer’s argument that its management had concerns about the employees’ “attitudes of not behaving like team players,” and that it “was concerned at the time of the termination that the appellants were planning to leave and start a competing fund.” Put simply, the court held that these issues were irrelevant since it chose to terminate their employment on a without-cause basis.
So, to determine what a fair and reasonable bonus would look like for these employees, the court looked to bonus pay the employer had awarded to similarly-situated employees who also worked as portfolio managers. After finding that the company had made significant returns on its fund and paid hefty bonuses of $200,000 to those other employees, it concluded that in all likelihood, this provided objective evidence that had it chosen to exercise its discretion in a fair and reasonable manner, it would have provided bonus pay to these employees as well. In other words, the employer’s decision to award $577 bonus to the employees for only their statutory two-ween notice period under the employment standards legislation and avoid paying their bonus accrued for 7 months they worked until termination was not “fair and reasonable.”
Lessons Learned
The point of this case for employees if your employment contract or company’s bonus plan gives you the opportunity to work hard to earn a discretionary bonus, there is an implied term that the employer’s discretion will be exercised in a fair and reasonable manner when it comes time to awarding bonus pay. So, the gist of this case is that if your employment is terminated, you should review your severance package with an employment lawyer so that, among other things, you are given full compensation, including bonus pay (even if your employer refuses to do so by calling it “discretionary”). The court’s decision is in line and forms a logical extension on the caselaw on the employer’s duty of good faith, honest contractual performance and fair dealing, including:
- Bhasin v. Hrynew (2014 SCC 71)
- Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26
- C.M. Callow Inc. v. Zollinger, 2020 SCC 45
For employers, the gist of this case is that that just because your employment contract (or bonus plan) says that the payment of a bonus is “discretionary” does not necessarily mean that you can do whatever you want (especially when bonus pay is a consistent part of an employee’s annual compensation). In other words, what the court is telling us in Bowen is that even if a company describes an employee’s bonus payment as being “discretionary”, it will still not have free reign to decide how you wish to dole out your bonus pay to employees in an unfair and arbitrary manner. Most importantly, if an employer decides to allocate bonuses in a “purely subjective” manner without any objective calculations, it will likely amount to a breach of the duty of good faith and fair dealing, resulting in the employee being awarded bonus pay in a wrongful claim claim or financial severance package.
Call Employment Lawyer Toronto Today
If you were terminated from your employment with or without severance package, call today to discuss your options. As an employment law firm in Toronto, Bune Law has reviewed many severance packages and are skilled at negotiating improvements. You will review and get guidance on your severance package before you agree to sign any termination documents, and help ensure that your severance package is fair and reasonable.