Bonus Entitlements upon Termination in Ontario

In some circumstances, provincially regulated employees in Ontario may be entitled to earned bonuses after the employment relationship has ended by way of termination. Under the Employment Standards Act (“ESA”), employees who have been terminated without cause are entitled to reasonable notice or pay in lieu of notice based on regular wages. The courts have demonstrated through case law decisions that if an employee would have earned a bonus before or during the notice period, then they are entitled to that said bonus upon termination (with some exceptions, of course). This is because pay in lieu of notice is deemed to include regular wages including all compensation and benefits that would be accrued during the notice period. Therefore, if an employee earned or would have earned a bonus before the notice period is up then it would constitute compensation that is generally owed to them. Of course, whether an employee is truly entitled to a bonus, especially bonuses that are usually based on the discretion of the employer, is only determined by a Court. However, the general precedent we see in case law can be a very helpful guiding factor in settlement discussions where termination and severance pay are being determined in a without cause termination.

An important thing to note is that not all bonuses will automatically be provided to employees upon termination. If an employment agreement, whether verbal or in writing, states that a bonus is only payable in certain circumstances and that employee does not actually earn the bonus, then it may not be paid to them. In addition, if a valid and enforceable employment contract that has been agreed upon by both parties clearly states that a bonus will not be paid upon termination then the right to that bonus has been restricted by contract and an employee will not be entitled to it. Of course, the contract must not go against the ESA and the drafting language must not be ambiguous. If a bonus is a common or frequently earned bonus that an employer has a steady history of providing such as a Christmas bonus each year that an employee comes to expect or rely upon, then it is more likely that such a bonus would still be paid to the employee if the bonus would fall in the notice period. However, if a bonus is more discretionary in nature and is attached to accomplishing a specific task that has not been met, then it is less likely that such a bonus would need to be paid out upon termination.

In the case of Paquette v TeraGo Networks Inc, 2016 ONCA 618, the Court provides some clarification in stating that generally speaking, if an employee is terminated then they are only entitled to their bonus if it can be shown to be an integral part of their usual compensation. Some of the factors the court looked at to deem a bonus integral include the following:

1. If the bonus was provided on a frequent basis, such as annually, even if the amount varied from time to time
2. If the bonus was typically awarded without question or automatically and the employer didn’t use discretion to determine if it should be given each year
3. If the bonus contributed to the overall compensation in a significant way and may have been relied upon
4. If the bonus was used to help retain employees and be competitive against other potential employers

Let’s use an example to illustrate this point. A manufacturing factory has created a new bonus for employees who make a certain number of shoes by a certain date. The bonus was not substantial and was discretionary in nature. An employee of this factory was terminated without cause when he was about three quarters to the production goal. The notice period ended well before the set date but he thinks that because he was close to the goal, he should receive the bonus. Is he correct in this thinking? No; he did not earn the bonus and was very unlikely to have earned it during the notice period. As the bonus was not a regular bonus and did not make up a significant portion of his compensation then it would likely not be required for the employer to pay this bonus upon termination. 

If you are an employee or an employer who would like assistance regarding a termination, our team of employment lawyers would be glad to assist you. You can reach us at 705-268-6492.