Employee Entitlements Upon Termination of Employment

A dismissed employee is entitled to be made whole during his or her reasonable notice period.¹ In other words, the employee’s severance or termination package should include all the employee’s compensation and benefits (including any commission, bonuses, stock options, pension contributions and insurance benefits) that the employee would have received had the employee remained actively employed during the notice period.  If the employer has a commission, bonus or stock option plan that contains language that allows an employer to dismiss an employee without notice and not pay the employee variable pay during the notice period, the employer will be required to prove that it made the employee aware of the terms of the plan.

Employees and employers are entitled to negotiate employment contracts that do not provide for the continuation of benefits or compensation (typically stock options, bonuses and pension contributions) during the reasonable notice period if the employee is dismissed without cause. This type of contractual agreement will rebut the presumption that a dismissed employee is entitled to all compensation and benefits during the reasonable notice period.²

However, any agreement or policy that limits the employee to only certain entitlements during the reasonable notice period must comply with the minimum standards of either the Employment Standards Act (“ESA”) or Canada Labour Code. Typically this is done by agreeing that all of the employee’s compensation and benefits will continue during the minimum notice period required by the ESA. At the end of the statutory notice period certain benefits and compensation will cease, while other compensation (normally the employee’s base salary) will continue to be paid throughout the longer reasonable notice period.   

Entitlement to Bonuses, Commission Payments, and Stock Options After Being Dismissed

The employee will be entitled to a bonus, commission pay and stock options (“variable compensation”) during the employee’s reasonable notice period absent contractual terms to the contrary. To determine the employee’s entitlement to variable compensation the employee’s employment contract should be reviewed as the relevant commission pay, stock option or bonus plan (“plan”).

The payment of variable compensation during the reasonable notice period will depend on whether the variable compensation was an integral part of the employee’s annual salary and the language of the plan.³

If the variable compensation plan is ambiguous about payment after the employee has been dismissed then the employee will be entitled to the variable compensation if it would have been paid during the reasonable notice period.⁴

Language in a plan referring to the termination of the employee’s employment will be presumed to be referring to a termination according to law (in other words, the employee will be given working notice of dismissal). The agreement should not be presumed to provide for an unlawful trigger event (such as dismissal without working notice) absent clear language to the contrary.⁵

For example, the Ontario Court of Appeal in Paquette v. TeraGo Networks Inc.⁶ found that a term in a bonus policy that required the employee to be “actively employed” when the bonus is paid, without more, is not sufficient to deprive an employee of a claim for compensation for the bonus he or she would have received during the notice period.

In Lin v. Ontario Teachers’ Pension Plan⁷ the Court of Appeal held at paragraph 62 that the following language did not unambiguously alter or remove the dismissed employee’s common law right to damages, which include compensation for the bonuses the employee would have received while employed and during the period of reasonable notice:

In the case where a Participant resigns or the Participant’s employment is terminated by [Teachers’] prior to the payout of a bonus (normally the first pay period in April), no bonus shall be earned or payable to the Participant.

In TeraGo the Court of Appeal set out the two-step analysis that is to be applied by a court when deciding whether a dismissed employee is entitled to a bonus at paragraphs 30 and 31:

The first step is to consider the [employee’s] common law rights. In circumstances where, as here, there was a finding that the bonus was an integral part of the terminated employee’s compensation, [the employee] would have been eligible to receive a bonus in February of 2015 and 2016, had he continued to be employed during the 17-month notice period.

The second step is to determine whether there is something in the bonus plan that would specifically remove the [employee’s] common law entitlement. The question is not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the [employee’s] common law rights.

If a plan states that payment of variable compensation is discretionary the employer must use its discretion in a fair and reasonable manner. In Chann v. RBC Dominion Securities Inc.⁸Chann v. RBC Dominion Securities Inc., 2004 CanLII 66310 (ON SC);  Wilton-Siegel J. wrote at para. 50:

The determination of whether the defendant’s representatives established the discretionary cash bonus in a fair and reasonable manner involves an examination of the process adopted by the defendant’s representatives and of the factors taken into consideration. The plaintiff is entitled to a process which ensures that the determination is made with adequate information regarding his relative contribution to the defendant’s financial performance. It is also incumbent upon the decision-maker to consider only factors which are reasonably related to the firm’s performance and, as far as is practicable, to apply those factors consistently among employees and from year to year. I agree with the defendant, however, that if the defendant satisfies this test, the Court should not interfere with the exercise of this discretion by substituting a different award applying the same factors.

Whether it is reasonable for an employer to take into consideration the fact that an employee’s employment has been terminated when deciding whether to pay the employee discretionary variable compensation will depend entirely on the term of the employment agreement between the parties.

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