Structuring Employee Bonus Agreements: Form, Substance, And Delivery Matter
Ontario’s Court of Appeal court recently released two decisions regarding an employee’s entitlement to bonuses upon termination. These decisions illuminate factors courts consider in deciding whether or not bonus payments are due during the reasonable notice period.
The respondent, Mikelsteins, was part of a select group of employees eligible to purchase shares of the appellant’s parent corporation. Those particular shares were governed by a Shareholder’s Agreement and allowed the employee to receive share bonuses in the form of a dividend. After 31 years of employment, the respondent was terminated without cause from his position as Director of Business Development.
Decision on the Motion
The motion judge determined the reasonable notice period to be 26 months and awarded him damages for the loss of the share bonuses that would have been payable to the employee over that period. The motion judge reasoned that the employee should be put in the same position they would have been in had he been lawfully terminated.
Court of Appeal: Rights under Shareholder Agreement Separate from Common Law Entitlements Under Employment Contract
The corporation appealed on the basis that there was a clause within the Shareholders’ Agreement which allowed the corporation to redeem shares from a terminated employee within 30 days of the termination. In this case, the shareholder would be entitled to the “fair value” of their shares, as of 30 days from the date of termination.
The Ontario Court of Appeal overturned the decision of the motions judge. Ultimately, Justice Nordheimer concluded that the motions judge had improperly conflated the employee’s entitlement to compensation arising from the breach of contract with his contractual entitlements pursuant to the Shareholders’ Agreement. Entitlements under both contracts remain in discrete categories, and the specific provisions under the Shareholders’ Agreement displace any common law entitlements flowing from the breach of the employment contract. Such a conclusion is consistent with public policy as a corporation would not want an employee to be able to exercise all of the rights of a shareholder once their employment is terminated.
The respondent, Dawe, a long-term employee, was terminated from his position within the appellant corporation without cause. Prior to his dismissal, the employee’s compensation package comprised of a base salary and supplemented by cash bonuses.
During the respondent’s employment, the employer implemented new bonus plans with onerous provisions limiting employees’ bonus entitlements upon termination without cause. In such cases, the employee would only receive a “Terminal Award” pro-rated to the last day of active employment, and only upon signing a “Full and Final Release.” Upon termination, the corporation relied on this clause to deny compensation to the employee over and above the quantum determined by the “Terminal Award.”
Court of Appeal: Employees must Know and Accept Adverse Changes to Compensation Packages
Although the Court of Appeal concluded that the wording of the plan unambiguously removed the employee’s bonus entitlements under the common law, the decision of the motion judge was upheld on the basis that the corporation failed to draw the restrictive provision to the employee’s attention. The court concluded that simply providing a copy of the bonus plans to the employee did not meet the legal threshold of communicating an onerous term that they later sought to rely on. The corporation failed to demonstrate that the employee knew of and accepted the adverse, unilateral changes to an integral part of his compensation package. The appeal was subsequently dismissed.
Take away for Employers
These decisions have widespread implications for employers offering bonus agreements as part of a compensation package who wish to terminate an employee.
Consider implementing share bonuses which are governed by separate Shareholders’ Agreements. The Court in Mikelsteins clarified that entitlements flowing from shares are contractually distinct from bonuses arising through the employment contract.
If offering cash bonuses as part of a compensation package, ensure that the wording of the provision clearly and unequivocally displaces common law rights flowing from a breach of the employment contract. More importantly, remember that relying on such a provision requires communicating it to your employees. Consider adding a space immediately after the clause for employees to initial or include a memo to employees making reference to the termination provisions.
Keeping apprised of legal developments and structuring your affairs accordingly can spare your business from engaging in costly litigation down the road.