The Ontario Court of Appeal recently released a decision on how damages ought to be assessed with respect to an employee’s bonus and benefits over the reasonable notice period.
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The Decision
In Singer v. Nordstrong Equipment Limited, 2018 ONCA 364, an employee commenced a wrongful dismissal action against his former employer seeking his lost salary, benefits and bonus over his reasonable notice period, as well as his unpaid bonus for the 2016 fiscal year. The employee was terminated without cause in December 2016. He was 53 years old at the time, had 11 years’ service, and held the position of President and General Manager. At the time of termination, he earned a base salary of $180,000, a matching 4 per cent contribution to a Registered Pension Plan, a car allowance, paid cell phone, and benefits. The employee also received an annual bonus based on the company’s annual pre-tax profit. The parties had not signed an employment agreement.
The employee brought a motion for summary judgment.
- Summary Judgment
The motion judge awarded the employee his 2016 bonus and pay in lieu of 17 months’ reasonable notice.
On the issue of the 2016 bonus, the court did not accept the employer’s argument that the payment of bonus was discretionary. The employer had argued that, based on policy documents and an email that went out to employees in 2014, bonuses were awarded at the employer’s discretion. In 2016, the employer would have exercised discretion to not award a bonus to the employee based on his poor performance. The judge rejected this argument, noting the termination letter made no mention of performance issues. The court found that the employee was entitled to a share of the bonus pool based on the language of the company’s bonus plan and the employee’s past record of receiving bonuses. The allocation of that bonus pool was at the employer’s discretion, but it ought to have been allocated according to a “fair and reasonable process." Since the bonus pool in 2016 was similar to the pools in 2012 and 2015, the fair and reasonable thing to do would have been for the employer to award the employee a similar allocation as in those years. The judge averaged the allocations used in 2012 and 2015 and awarded the employee a bonus for 2016 based on that calculation.
What the motion judge did not award the employee was his bonus over the notice period. The purpose of the company’s bonus plan was to maximize efforts to generate profits, and it would not have been within the employee’s reasonable expectation to be able to earn a bonus during his notice period while he searched for alternative comparable employment.
The motion judge set the notice period at 17 months. However, the court did not award any amount for the loss of the employee’s benefits over the notice period. The court reasoned that the employee failed to prove he suffered a loss; specifically, he did not produce any evidence that he replaced the benefits he would have enjoyed over his notice period.
The employee appealed the dismissal of his claims for his bonus and benefits over the reasonable notice period.
The employer cross-appealed the motion judge’s decision to award the employee his 2016 bonus as well as the decision to set the notice period at 17 months.
- Court of Appeal
The Court of Appeal allowed the appeal and dismissed the employer’s cross-appeal.
With respect to the cross-appeal, the court held that the motion judge assessed reasonable notice in a holistic manner and there was no error in his approach or the result he reached. Similarly, there was no error of law or palpable or overriding error of fact in the decision to award the employee his 2016 bonus.
On the other hand, the Court of Appeal reversed the motion judge’s decision to deny the employee’s claims for bonus and benefits over the notice period. On the issue of his benefits, the court found that the motion judge had cited no authority for the approach that the employee must prove he suffered a loss to make out a claim for benefits over the notice period. To the contrary, the law in Ontario was settled in the case of Davidson v. Allelix Inc., 1991 CanLII 7091 (ON CA) (“Davidson”), where the Court of Appeal held that a wrongfully dismissed employee may claim the pecuniary value of lost benefits flowing from termination. Davidson specifically rejected the principle that the assessment of damages for lost benefits is based on what benefits would have cost the employee throughout the notice period. Therefore, the motion judge committed an error of law in reaching his decision.
The Court of Appeal also found that the motion judge erred in law by not awarding the employee his bonus over the notice period. Specifically, the motion judge failed to apply the two-part test, set out in Paquette v. TeraGo Networks Inc., 2016 ONCA 618 (“Paquette”) to determine whether an employee is entitled to a bonus over the notice period. The Paquette test involves the following two steps: 1) to determine whether bonus is an integral part of the employee’s compensation package, and 2) if so, to determine whether there is language in the bonus plan that unambiguously alters or removes the employee’s entitlement to a bonus over the notice period. Had the motion judge applied this test, it would have found that bonus was an integral part of the employee’s compensation and there was nothing in the company’s bonus plan that limited his entitlement to a bonus over the notice period.
The Court of Appeal rejected the employer’s argument that the employee would have known it was the company’s policy not to pay any bonus to employees after their termination because the purpose of the bonus plan was to incentivize employees to perform. The Court of Appeal noted that nothing to this effect was expressly written in the bonus plan. As such, the bonus plan did not displace the employee’s entitlement to a bonus over his notice period.
Accordingly, the employee was awarded his bonus and benefits over the notice period, and the motion judge’s decision to award him his 2016 bonus was upheld.
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Significance of Decision
This decision confirms how damages will be assessed with respect to an employee’s bonus upon termination as well as bonus and benefits over the notice period.
On the issue of an employee’s bonus, the test set out in Paquette continues to govern the determination of whether an employee is entitled to a bonus over the notice period.
With respect to an employee’s entitlement to a bonus leading up to termination, the decision confirms that employers ought to follow a “fair and reasonable process” in issuing bonus payments. In determining what is fair and reasonable, courts will consider the language in bonus plans and the history of bonus payments. Policy documents and emails stipulating that bonuses will be paid at the employer’s discretion are not determinative of the employee’s entitlement.
On the issue of benefits over the notice period, the decision confirms that the assessment of damages is not based on the employee’s replacement costs of those benefits over the notice period, but rather on the pecuniary value of lost benefits flowing from termination.
ABOUT THE AUTHOR
Ozlem Yucel is an Associate at Turnpenney Milne LLP. She represents both employers and employees in all aspects of employment law. She also acts as external, independent investigator in workplace investigations. Ozlem is a member of the OBA’s Labour and Employment, as well as the Alternative Dispute Resolution, Section Executives. She can be reached at ozlem@tmllp.ca or 416-868-1457 ext. 103.