Employee Payments after Termination in a Severance Package
When an employee’s job is terminated, the employer is usually required under Ontario employment law to provide them with a severance package, which will usually include all of the regular compensation they would have received during their “reasonable notice period.” What does that mean?
Unless an employer can prove an employee committed serious misconduct that justifies immediate dismissal from their job (this is called a “termination for just cause“), they must first provide the employee with prior notice before their last day of work, or compensation in lieu of notice in a financial severance package (this is called a “termination without cause“). The only exception to this rule is if the employee has agreed in an employment contract to receive only the minimum termination pay and severance pay required under the Ontario Employment Standards Act, 2000 (ESA).
The main purpose of employers providing reasonable notice (or damages in lieu thereof) is to protect employees by providing them an opportunity to seek alternative employment.
In situations where an employee believes the employer fired them without justification (without cause), and still failed to provide them with an adequate financial severance package, they could bring a claim of wrongful dismissal in court.
To be fair and reasonable, an employee’s severance package upon termination of their employment without cause must include all the regular payments they received while employed, including wages (salary), health benefits, pension benefits and bonus pay. Out of all of these forms of compensation, the most contentious of all is usually the employee’s claim for bonus pay after their employment is terminated.
The main reason for employers pushing back against an employee’s claim to be paid bonus after termination is the fact it often makes up a large chunk of an employee’s overall compensation and, as many employers try to argue, it is generally intended to be “discretionary” or based on an employee successfully meeting their performance targets.
Am I Entitled to my Bonus Pay if my Employment is Terminated?
With a few exceptions, the answer has generally been “Yes” – an employee should receive all of their bonus compensation in three respects:
- all bonus for previous fiscal year (if not paid prior to employment termination)
- all bonus the employee has accrued to the termination date
- all bonus the employee would have accrued over their reasonable notice period after termination
In Ontario, the focus has generally been on asking (i) whether bonus pay was “an integral part” of the employee’s entire compensation for their job, and (ii) whether the employee signed a document (e.g., employment contract or bonus plan) that clearly removes their right to receive bonus pay if their employment is terminated.
However, in a recent case called Matthews v. Ocean Nutrition Canada Ltd., the Supreme Court of Canada released a very favourable ruling that many employees can rely on to justify being paid their bonus after termination. While the general test is the same, the courts are now required to focus less on whether the bonus was an “integral part” of the employee’s compensation, and instead focus on whether the employee would have been paid the bonus as part of their continued employment during the notice period. The court said the analysis should involve asking two questions:
- Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?
- If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
In other words, because a “wrongful dismissal” means the employee violated their obligation to provide the employee with proper notice of termination before their last day of work, the courts focus prospectively on answering the question:
“What forms of payments would the employee have continued to earn had they been allowed to continue working until their very last day of work.“
For example, take the scenario of a 46-year old office manager who is terminated from their employment “without cause,” after 10 years of working for the same employer. Let’s also assume the employee has never signed a valid employment employment contract limiting their termination entitlements to only the statutory minimums required by the ESA (in terms of termination pay, benefits and severance pay).
In this case, as part of a successful wrongful dismissal claim, the employee would generally be awarded compensation in lieu of reasonable notice of termination under “common law.” The court would consider his age, years of service, position, availability of similar employment (and other relevant circumstances), and potentially award the employee damages equal to 10-12 months of compensation.
The question now becomes well, what forms of “compensation” will the employee’s wrongful dismissal damages include?
To question, this new Supreme Court decision tells us to first focus on including all the income, benefits, and bonuses the employee would have received had the employer not breached the implied term to provide reasonable notice (i.e., letting the employee work and earn her regular income for the entire 12 months before their last day on the job). If an employer fails to give proper notice or pay in lieu of notice (or a severance package), the breach of contract is in the employer’s failure to pay – not in the termination itself.
Next, the employer is required to consider whether the employee has signed any document that contractully limits or remove his common law right to receive the bonus pay. If not, the employee is entitled to damages equivalent to what she would have received under the bonus plan if she had continued working through the reasonable notice period. This is what makes it important for employers (and employees) to review their employment agree to analyze whether it properly limits or removes an employee’s common law rights in a way that is “absolutely clear and unambiguous”.
For example, in finding that the employee’s employment contract did not properly remove or limit his entitlement to bonus pay, the court rejected a number of arguments employers typically make:
- the employee must be a “full-time” or “active” employee at the time the company pays out the bonus
- the employee is not entitled to bonus pay, regardless of whether their employment is terminated “with cause” or “without cause” (this is unlawful since, even if an employer is entitled to terminate without cause, it must still provide proper compensation)
- language in the employment contract removes an employee’s entitlement to bonus pay from compensation and calculation of severance (which is illegal, because the legal concepts of “severance pay” and “damages” for wrongful dismissal are entirely different and serve different purposes)
- language in an employment contract states that the bonus pay has “no current or future value” unless a specific event occur
Contact Employment Lawyer
If you are an employee or an employer looking for an employment lawyer to help with a termination of employment and severance package, please contact Bune Law today.
Understanding a termination letter or severance package often requires understanding the impact on your employee bonus pay entitlement. If you think that your employer is not compensating you fairly for your pension in your termination package, please call Bune Law to discuss your rights and options. To speak with an experienced employment lawyer, please contact 647-822-5492.
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