One of the most common battlegrounds in Ontario wrongful dismissal litigation is the end-of-year bonus. When an employer terminates a worker, they typically offer a basic salary continuation but attempt to strip away variable compensation, bonuses, or stock options.

No, absent an agreement to the contrary, employees are entitled to their entire compensation package, following a termination.

A bonus is treated as an integral component of your total compensation package, not a discretionary gift. Employees are typically entitled to their entire remuneration package, including bonus pay, following their termination during the reasonable notice period.

To successfully deny an employee their bonus during a notice window, boilerplate contractual language like “must be actively employed” are no longer legally sufficient.

In Ontario, the starting point is the decision of the Ontario Court of Appeal in Paquette v. TeraGo Networks Inc. The Court established a two-step framework for determining whether a dismissed employee is entitled to bonus compensation after termination:

  • Was the bonus an integral component of the employee’s overall compensation? If the bonus formed a regular and expected part of the employee’s earnings rather than a purely discretionary reward, it will generally be presumed to continue during the notice period.
  • Does the bonus plan contain clear and enforceable language removing that entitlement? Employers can limit or exclude bonus payments following termination, but only if the contractual language does so in unmistakable terms. Any uncertainty or ambiguity will generally be interpreted in the employee’s favour.

Many bonus plans attempt to restrict entitlement by stating that an employee must be “actively employed” or a “full-time employee” on the date a bonus is paid. However, Canadian courts have repeatedly held that these phrases alone are often insufficient to eliminate an employee’s common law rights.

The Supreme Court of Canada’s decision in Matthews v. Ocean Nutrition Canada Ltd. provides one of the leading examples. Although the employer argued that the long-term incentive plan required the employee to be actively employed to be eligible for a bonus, the Supreme Court concluded that, for the purposes of assessing common law damages, the employee is treated as though he remained employed throughout the notice period. The Court further held that references to “severance” or “active employment” did not clearly exclude the employee’s entitlement to damages representing the lost bonus payment.

These decisions illustrate an important point for both employers and employees: simply including “active employment” language in a bonus plan will not necessarily defeat a claim for bonus compensation following a without-cause dismissal. Whether bonus damages are recoverable depends on the wording of the plan, the nature of the compensation, and the circumstances of the termination.

What Components Make Up a Severance Package?

A proper common-law notice assessment covers your entire compensation package, not just your base salary or hourly rate:

  • Base salary continuation or lump-sum equivalent.
  • Continued contribution to and participation in health, dental, and life insurance benefits.
  • Pro-rated bonuses or commissions that would have matured during the notice period.
  • Continued contributions to and participation in company RRSP and pension programs.
  • Value of car allowances, cell phone subsidies, or professional membership dues.

How Pelsmakher Law Can Help

For employees: Do not accept a severance package that cuts out your eligible bonus or commissions. Know what you are truly owed by working with an experienced employment lawyer.

For employers: If your variable compensation plans rely on old templates, you are likely exposed to significant retroactive claims. Let Pelsmakher Law review and redraft your executive compensation plans.