Termination of employment can be a traumatic experience. If an employee has been fired without case, the employee is entitled to reasonable notice of termination or pay in lieu of notice also known as a severance package.
The purpose of a severance package is to put the terminated employee in the position the employee would have been in had the employee continued their employment through to the end of the reasonable notice period.
In most cases, calculating what an employee may be entitled to in a severance package after their employment has been terminated without cause is an exercise in determining the notice period and then simply multiplying their salary by the number of weeks or months in the notice period.
However, for employees who receive a portion of their compensation in the form of a bonus or other incentive-based compensation, the exercise of calculating the value of a severance package is more complicated.
On the termination of employment on a without cause basis, the employer is obligated to pay in a severance package those aspects of remuneration that the employee would have received during the notice period, unless the terms of employment clearly state otherwise—i.e., through an employment agreement or policy.
The first step is to look at the employment agreement. Does the employment agreement govern what notice period the terminated employee will be entitled to, and does it specify how damages will be calculated in a severance package? The employment agreement may do so, but employment agreements are often challenged in court, and sometimes struck down.
When it comes to whether a terminated employee is entitled to be paid incentive-based compensation in their severance package—such as bonus plans, stock options (vested or unvested), restricted or deferred sales units (RSUs or DSUs)—the details of the agreement or policy governing the incentive-based compensation at issue are important.
It is important to determine whether the employee agreed to any contractual terms that purport to restrict the inclusion of such compensation in a severance package. In many instances, employment agreements will refer to and incorporate applicable policies and procedures that form part of the employment agreement, which will govern bonus or incentive-based compensation rights during the course of employment and upon termination of employment. In addition, employees are often required to agree to the terms of specific policies such as a bonus or option plans as a condition of receiving an award.
In Matthews v. Ocean Nutrition, the Supreme Court of Canada set out a two-part test to determine whether damages for pay in lieu of notice should include payment of a bonus and other benefits in a severance package. It must be determined:
- whether the terminated employee have been entitled to the bonus or benefits as part of the employee’s compensation during the reasonable notice period?
- if so, do the terms of the employment contract or bonus plan unambiguously and clearly take away or limit that common law right? To take away the right to payment of such compensation in a severance package, the provisions of any agreement or policy must be “clear and unambiguous”.[1]
If there is doubt as to whether the employee would have received discretionary bonuses during the reasonable notice period and therefore possibly in the severance package, the court will analyze whether the payment of bonuses is or has become an integral part of the pay package of the employee. Bonuses can (in some cases) be held to be integral even where a bonus is described as discretionary.[2]
A bonus will be an integral part of an employee’s compensation where:
- a bonus is received each year;
- a bonus is required to be paid to remain competitive with other employers;
- a bonus was historically awarded and the employer had never exercised discretion against the employee; and
- a bonus constituted a significant component of the employee’s overall compensation.[3]
The mere fact that a bonus is discretionary does not mean that the decision to not award a bonus in a severance package can be made in an arbitrary or unfair fashion. An employer must follow a fair and identifiable process for determining whether a bonus is to be included in an employee’s severance package.[4]
Employees whose employment has been wrongfully terminated should have an experienced employment lawyer review the applicable contractual and policy terms that govern entitlement to incentive-based compensation to determine whether such compensation ought to be included in a severance package.
The mere fact that a policy exists that purports to take away an employee’s rights to incentive based on compensation in a severance package does not suffice to take away that right if the language is not sufficiently clear and unambiguous.
If your employment has been terminated, contact us today for a free consultation: info@jsblaw.ca or 403-620-5400.
[1] Matthews v. Ocean Nutrition, 2020 SCC 26 at para 65.
[2] Brock v. Matthews Group Ltd. (1988), 20 CCEL 110 (Ont HC), at para 44, aff’d (1991), 34 CCEL 50 (Ont CA), at paras 6–7; supra at paras 56–58.
[3] Gillies v. Goldman Sachs Canada Inc., 2000 BCSC 355 (CanLII) at para 62, aff’d 2001 BCCA 683 (CanLII). The factors were cited most recently in Shalagin v Mercer Celgar Limited Partnership, 2022 BCSC 112 (CanLII) at para 92.
[4] Bain v UBS, 2016 ONSC 5362 at paras 85-90, aff’d ONCA
