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How to Say What You Mean: The Importance of Contractual Bonus Language

Published: 04/24/2017

By Kristin Taylor

In the last several months, Canadian appellate courts have considered employer’s bonus plans three times. Having discussed the implications of these decisions with many clients, the common reaction seems to be: But that isn’t what we meant when we drafted our plan! Rather than debate how language can be misinterpreted, the more constructive approach simply is to fix it. When these appellate decisions are considered carefully, the take-away message for employers is that incentive plan language will be carefully scrutinized and entitlement only excluded where the language clearly supports that result.  Accordingly, now is the time for employers to review their existing plans and policies and update them, where appropriate, to ensure that they will be interpreted as they intended.

In our e-Lert “Top 10 Employment & Labour Law Cases and Trends in 2016,” we noted two of these appellate court decisions: Paquette v. TeraGo Networks, 2016 ONCA 618 (Paquette) and Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619 (Lin). Both decisions were released by the same panel of the Ontario Court of Appeal in August 2016. One of the issues common to both decisions was entitlement to bonus payments following dismissal.

In Paquette, the bonus program required the employee to be “actively employed” on the date of payout to be eligible. In prior years, the employee had been awarded between $7,800 and $31,800 in annual bonus. The Court of Appeal found that the “active employment” pre-condition for the payment of bonus did not limit his common law right to the inclusion of bonus in his damages for wrongful dismissal. Rather, the Court of Appeal found that a term requiring active employment when the bonus is paid, without more, is not sufficient to defeat a claim for compensation for stub bonus through the date of termination as well as the inclusion of bonus on top of salary during the period of pay in lieu of notice.

In Lin, the employer sought to rely on a Long-Term Incentive Plan (LTIP) definition of Termination Date that “for greater certainty, does not include any period following the date on which a Participant is notified that his or her employment or services are terminated (whether such termination is lawful or unlawful) during which the Participant is eligible to receive any statutory, contractual or common law notice or compensation in lieu thereof or severance payments.” The Plan provided that on the Termination Date, a Participant would forfeit any and all rights to be paid a bonus under the plan. This definition, however, was introduced in a LTIP amendment that employees, including Lin, refused to accept. Accordingly, the Court of Appeal found that the employer could not rely on it. This meant the employer was left relying on earlier plan wording that simply provided if a Participant resigned or was terminated, grants not yet vested at the time of termination would be forfeited without any right to compensation. The Court of Appeal again found this wording to be insufficient to unambiguously alter or remove the employee’s common law right to damages for bonus he would have received during the reasonable notice period. The Court of Appeal did not comment on the effectiveness of the LTIP amendment; however, it appears to address the concern identified with the earlier wording. It specifically removed the common law right to damages for lost bonus following the date on which employment terminates. One caution though: The language purports to contract out of section 60(a)(a) of the Employment Standards Act, 2000 which prohibits employers from altering any term or condition of employment during the statutory notice period.

More recently, in January 2017, in Styles v. Alberta Investment Management Corporation, 2017 ABCA 1 (Styles), the Alberta Court of Appeal overturned a Court of Queen’s Bench decision that held an employee with less than four years of service was entitled to a bonus under his employer’s LTIP that expressly required four years of service for the bonus to vest. The basis upon which the Court of Queen’s Bench concluded the employee’s grant should not have automatically forfeited was the stated requirement that the employer exercise its discretion in administering the LTIP fairly and reasonably relying on the Supreme Court of Canada’s decision in Bhasin v. Hrynew, 2014 SCC 71 (Bhasin). The Alberta Court of Appeal unequivocally rejected the analysis of the Court of Queen’s Bench.

The contractual language of the LTIP, as always, is critical. In this case, the Court of Appeal found that, on a plain reading of the LTIP bonus was only paid when they vest under a four year cycle, a participant must be actively employed on the vesting date which did not include a period of notice or payment in lieu, and the employee was terminated before he completed four years of employment. The employee argued that there was a discretion involved in the forfeiture because the LTIP provided that “entitlement to an LTIP grant, vested or unvested, may be forfeited upon the Date of Termination of Active Employment...”. The Court of Appeal disagreed and determined that “may” merely indicated that upon certain events the right to a bonus would be lost. “May” was found to operate as a warning or caution, not a signal of discretion.

The employee also argued that the employer was required to exercise its discretion to only terminate his employment with a justifiable reason. The Court of Appeal rejected this argument as well. In so doing, the Court of Appeal also set out important, fundamental employment law principles of interpretation worth repeating in view of the uncertainty created by Bhasin:

  • Reasons are not needed for termination without cause, not because the employer does not have reasons, but simply because fundamental incompatibility between the employee and the employer, or the work, or other employees, is difficult to express in words. [para.37]
  • The general duty of good faith in contract law did not “...extend to the employer’s reasons for terminating the contract of employment because this would undermine the right of an employer to determine the composition of its workforce.” [para.46]
  • The Bhasin principle relates to the performance of the contract; it does not relate to the negotiation or terms of the contract. In particular, it does not invite the court to examine the terms of the contract to assess whether they are fair and reasonable. [para. 51]
  • Bhasin does not make it dishonest, in bad faith or arbitrary to require performance of a contract in accordance with its terms. [para. 52]
  • Refusing to pay a bonus that is not payable is not dishonest. [para. 52]
  • Acting in one’s self-interest in a commercial contractual context is neither dishonest, capricious, nor arbitrary. [para. 57]
  • Whatever the reasons, if one party to a contract is given a discretion, it should be allowed to exercise that discretion without being second-guessed by the courts with the benefit of hindsight. [para. 60]

Of particular note is the Court of Appeal’s conclusion that the employer’s point of view that it was unreasonable for the employee to claim a bonus to which he agreed he would not be entitled, is just as worthy of consideration as the employee’s claim that it was unreasonable for him not to have received a bonus. According to the Court of Appeal, the fairness and reasonableness analysis require a consideration of the positions of both sides, remembering that each party is entitled to promote its own interests.

When reviewed collectively, three take-aways from these decisions are:

  • Bonus plan language should acknowledge that it is a reward for past performance as well as an incentive for future performance.
  • Bonus plan language, like pension language and stock option language, must expressly and precisely contract out of any period of notice or severance required under statute or contract and reasonable notice under common law. There is an exception for Ontario employers who should acknowledge that the notice period required by the ESA extends the date following which forfeiture can occur.
  • Requiring “active employment” as a condition of bonus payment will not effectively eliminate an employee’s entitlement on termination, except where – as in Styles – it is a pre-condition to even participating in a plan. The key in Styles is that a lengthy (four year) period of employment was required to be eligible to participate in the plan.

As with the trend we are seeing for courts to enforce unambiguous termination provisions, we expect to see courts enforce properly drafted incentive plan language as well. It is definitely incumbent upon employers though to review their existing language to ensure that it says what you mean considering the case law above.