We are often asked what elements of pay factor into severance. Are employees entitled to bonuses? We reviewed whether severance and bonuses are included in pay in lieu of notice in a two-part series you can find here and here, but the topic is worth revisiting in light of a recent Supreme Court of Canada decision on the topic.
When an employee is dismissed without cause, they are entitled to notice of termination. By default, employees are entitled to working notice of termination. The employee simply keeps working and getting paid as usual until the end of their notice period.
Employers often prefer for the employee to leave immediately rather than have them keep working during the notice period. In these situations, the employee should be paid “in lieu” of notice, often referred to as severance.
A wrongful dismissal happens where the employer provides insufficient working notice or pay in lieu. Two issues are usually in dispute:
- How long is the notice period?
- What elements of pay should be included in pay in lieu of notice?
The first step in determining appropriate pay in lieu of notice is determining how long the notice period should have been. The second step is determining what elements of pay they should received during the notice period. The Supreme Court of Canada recently provided some guidance on this step, with a particular focus on bonuses during the notice period, in Matthews v Ocean Nutrition Canada Ltd.
Matthews v. Ocean Nutrition
Mr. Matthews was an executive employee with Ocean Nutrition, a company that made omega-3 products from fish oils. He was employed for 13 years and participated in the company’s Long-Term Incentive Plan (LTIP). The LTIP provided a large payment to participating employees upon the sale of the company.
Following a period of marginalization by the company, Mr. Matthews was constructively dismissed. The trial judge determined he was entitled to 15 months of reasonable notice. Ocean Nutrition was sold 13 months after Mr. Matthews’ termination, triggering the LTIP payments. The payment to Mr. Matthews would have been over $1 million. Ocean Nutrition said he was not entitled to the payment because he was not “actively employed” when the company was sold. Mr. Matthews’ entitlement to LTIP was the dispute at issue before the Supreme Court of Canada.
How to determine if bonuses are included in the notice period
The Supreme Court confirmed that pay in lieu of notice equals the amount of compensation the employee would have received during the notice period if they had been given working notice. This will include all the elements of pay they would have received while on working notice, including bonus. This has been settled law in British Columbia for years, although questions about the terms of particular contracts often arise.
The Court clarified that employers do not automatically have the right to terminate immediately and provide pay in lieu of notice – the employee’s common law right is to working notice of termination. The aim of wrongful dismissal damages is, therefore, to put the employee in the position they would have been in, had the employer not breached its obligation to provide working notice. This is a helpful simplification of what had become a needlessly complex issue.
First, it must be determined whether the employee would have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period. In this case, if Mr. Matthews had been given 15 months of reasonable notice, he would have been “actively employed” at the 13-month mark when the company was sold and LTIP paid out to participants in the plan.
The next step is to review the written terms of a relevant contract. The test is whether the written terms of the employment contract or bonus plan unambiguously take away or limit the default common law right to all elements of pay during the notice period. Many contracts try to do this, but as Matthews demonstrates, few succeed.
Contractual language have difficulty limiting payment of bonuses
Many bonus plans and employment contracts state that the employee must be “actively employed” to receive their bonus. This was the case in Matthews, where the wording required that participants be “full-time employees” to receive LTIP. The Court found that this wording did not take away Mr. Matthews' right to LTIP, since he would have been “active” or a “full-time employee” had he received working notice. In other words, the law treats employees as "actively employed" until the end of their notice period.
Contracts stating that bonuses will not be paid if the employment is terminated “with or without cause” are also not sufficient to take away an employee’s right to a bonus during the notice period. This is because the employment contract is not considered terminated until the end of the notice period.
Even where their wording manages to effectively limit payment of bonus during the notice period, in some circumstances, the employer will need to have brought the clause to the employee’s attention before the contract was signed in order to enforce it.
Takeaways
The bar is set high for employers wanting to limit their obligation to pay bonuses after terminating an employee. This means employees will usually be entitled to a bonus if it was scheduled to be paid during the notice period. This may even be true in cases where the contract contains express wording that limits the right to the bonus upon termination.
Contact us to book a consultation and learn how long your notice period ought to be, and what elements of pay factor into it.
