A key question Ontario employment lawyers help addressing is a worker’s entitlements to bonus pay after termination of employment. In this blog article, we discuss an employer’s key legal obligations surrounding employee compensation and termination. A leading case called Matthews v. Ocean Nutrition Canada Ltd. offers valuable guidance on these issues.
Whether you’re an HR professional preparing employee severance packages, or a business owner updating contracts for the new year, understanding how bonuses, commissions, and other benefits are treated upon termination is essential. This is especially important when dealing with potential claims of constructive dismissal claims, planning severance package, or changing employment contracts. An initial consultation with a wrongful dismissal lawyer, severance package review lawyer, or employment contract review lawyer can help minimize legal risk and ensure compliance.
The Landmark Case: Matthews v. Ocean Nutrition Canada Ltd.
This pivotal Supreme Court of Canada decision clarified how post-termination compensation should be handled, especially when long-term incentive plans or bonus pay structures are involved.
The employee, Mr. Matthews, had worked with Ocean Nutrition for over 14 years when he was constructively dismissed – meaning his work conditions were significantly altered without his consent, leading to a termination in the eyes of employment law. His employment contract included a long-term incentive plan (LTIP), which would pay out upon a sale of the company if specific conditions were met.
Soon after his departure, the employer, Ocean Nutrition, was sold. Mr. Matthews argued he was entitled to his share of the LTIP payout. The employer disagreed, citing language in his employment contract that denied benefits to individuals no longer employed at the time of the sale.
The Supreme Court sided with the employee. It found that because the sale occurred during the “reasonable notice period” – the time he should have still been employed had he been properly terminated – he was entitled to constructive dismissal damages equivalent to what he would have received under the LTIP. The Court also emphasized that any contractual attempts to exclude such entitlements must be clear and unambiguous to be enforceable.
Why This is Important
This case is relevant for employers and employees in understanding their respective legal rights and obligations regarding bonus pay after termination of employment, but also at other times such as:
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Pay out bonuses and commissions
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Finalize performance reviews
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Begin planning compensation packages for the following year
All of these are important times for potential employment disputes over unpaid bonuses, commissions, or vested stock options – especially if an employee has been recently terminated or is facing changes that could lead to a claim of constructive dismissal or wrongful dismissal.
Key Legal Takeaways for Employers
To protect your business and treat employees fairly, here are three crucial lessons to keep in mind from the Matthews decision:
1. Bonus and Incentive Clauses Must Be Clear
Language in employment contracts that attempts to exclude terminated employees from bonuses or incentive plans must be specific, unambiguous, and legally enforceable. Courts are likely to interpret vague clauses in favour of the employee.
If your contracts include any form of incentive pay – be it bonuses, stock options, profit-sharing, or LTIPs – it is essential to have these reviewed by an employment contract review lawyer.
2. Reasonable Notice Covers More Than Salary
In Canadian employment law, the reasonable notice period in a severance package after termination includes all compensation an employee would have received had they continued working. This means:
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Base salary
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Performance bonuses
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Holiday bonuses
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Sales commissions
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Stock options and equity-based awards
Failure to account for these elements in a severance package can expose employers to wrongful dismissal claims. An experienced Ontario severance package review lawyer can help ensure your offer reflects all components of the employee’s entitlements.
3. Timing of Termination Matters
If you terminate an employee in December – or at any time close to a significant bonus payout – and their reasonable notice period includes the time bonus pay would have been paid out, they may be entitled to the equivalent value of those missed bonuses or commissions.
This is a common oversight and can lead to unexpected legal liabilities if not handled with care. Documenting and clearly communicating bonus policies can go a long way in avoiding disputes.
Proactive Steps for Employers
If you are looking to minimize legal risk and create more transparent employment practices, here’s a checklist to guide you:
– Update Employment Contracts
Review existing employment contracts for clarity and compliance. Make sure any limitations on bonus eligibility or incentive payouts post-termination are drafted clearly and in plain language. An employment contract review lawyer can assist in identifying weak spots or unenforceable clauses.
– Clarify Bonus and Commission Policies
Clearly outline how and the eligibility conditions for bonuses are paid – especially under what conditions they may be forfeited after termination of employment. These policies should be included not just in employment contracts, but also in bonus plans.
– Consult With an Employment Lawyer
If you are planning terminations or revising employment contracts, seek legal guidance. A constructive dismissal lawyer or wrongful dismissal lawyer can help you understand your legal obligations and avoid costly mistakes.
Why Legal Advice Is Worth the Investment
Many businesses mistakenly believe that severance is limited to a few weeks of base pay. But Canadian employment law is far more nuanced. Courts will consider the full scope of compensation an employee would have received during the reasonable notice period – including year-end incentives, pension plans, commissions, and bonus pay.
Failing to account for this can result in costly wrongful dismissal claims, damage to your reputation, and prolonged legal disputes.
Partnering with a knowledgeable employment lawyer ensures your practices are compliant and your risk is minimized. It also demonstrates respect for employees’ contributions, reinforcing your company’s goals and values.
The Matthews case is a strong reminder that post-termination compensation is not just about base salary. Courts will look at the entire compensation package and whether an employee would have earned more had they not been wrongfully dismissed. With proper planning and legal guidance, employers can avoid surprises and treat their workforce fairly.
If you are unsure where your contracts or policies stand, consider reaching out to a Toronto employment review lawyer for a detailed assessment.
Call Employment Lawyer Toronto Today
For many employers, termination of employment is a difficult and confusing time, especially when it comes to drafting severance packages. Therefore, in a wrongful termination of employment, it is important for employers to consult with an experienced Ontario employment lawyer for a severance package review to understand the impact of wrongful dismissal on pension plans. If you are an employer or employee needing to speak with an experienced Ontario wrongful dismissal lawyer to discuss your options and next steps on how to deal with workplace issues, call Bune Law, employment law firm in Toronto. 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.