Ontario Court of Appeal Upholds “Harsh” and “Draconian” Bonus Eligibility Language
May 24, 2017
Employment Litigation
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Employment
Bottom Line
Courts may enforce contract provisions that limit or forfeit an employee’s entitlement to a bonus after termination if the language is clear and explicit.
Facts: Lawyer terminated without cause before bonus eligibility date
The plaintiff had been employed as Vice President and Division General Counsel under a negotiated written contract. During the contract negotiations, the plaintiff made several changes to the original offer. Although the salary was lower than the plaintiff would have liked, he ultimately signed because the contract provided an opportunity for him to earn significant bonuses.
The employment contract specified that the plaintiff had to be employed at the time of the bonus being paid. To demonstrate how this rule would apply in various circumstances, the agreement provided several examples.
The employment contract also stated that the plaintiff would receive four weeks’ notice or pay in lieu thereof for each year of service (pro-rated for partial years) upon termination provided he executed a full and final release.
The plaintiff was terminated in 2010 on a without cause basis approximately five months in advance of the bonus payout date. The employment contract entitled the plaintiff to only eight (8) weeks’ notice of termination, which fell significantly short of the bonus payout date. Consequently, the employer took the position that the plaintiff was not entitled to any bonus payment. Because the plaintiff refused to sign a release, he was paid only two (2) weeks’ notice in accordance with the Employment Standards Act, 2000 (the “ESA”).
In addition to suing for wrongful dismissal and claiming entitlement to six (6) weeks’ notice under the employment contract, the plaintiff also claimed entitlement to a bonus. He claimed that the bonus language in the employment contract was unenforceable because it:
- was contrary to public policy;
- had been inconsistently applied; and
- was ambiguous, contradictory and illegal.
Trial Court found no entitlement to bonus
The Superior Court of Justice upheld the employer’s right to withhold the plaintiff’s bonus because the eligibility language was very explicit and even included examples to clarify the provision. The Court also found there was no ambiguity with respect to the circumstances under which a bonus would be payable. Although the effect of the language was harsh, the Court found that a harsh provision could still be enforceable if both parties had agreed to it.
The Court also dismissed the plaintiff’s claim for six (6) weeks’ notice under his contract, finding that the termination provision made the payment of notice beyond ESA minimums contingent upon the signing of a release, which the plaintiff had refused to do.
Court of Appeal upholds trial court’s judgment
On appeal, the Court of Appeal found that the relevant terms of the contract were fully compliant with the ESA and that the contract clearly contemplated the plaintiff would have received the bonus had the payout date occurred during the ESA notice period.
The Court of Appeal agreed with the trial Court’s reasoning that “[p]ublic policy would be ill served by permitting the plaintiff to accept a potentially lucrative position with the full knowledge that it contained a potentially unfavourable limitation clause and then to complain when that clause was actually executed.”
The Court also rejected the plaintiff’s attempt to claim six (6) months’ common law reasonable notice damages, as he had not advanced this claim at trial.
Check the Box
This decision is a positive one for employers following a number of decisions in which Ontario courts (including the Court of Appeal) have been hesitant to enforce contractual language limiting a dismissed employee’s entitlement to a bonus. This case indicates that where bonus limitation and termination language is clear, explicit, and compliant with minimum employment standards legislation, it will be enforced. Note that the plaintiff in this case was particularly sophisticated, so it remains to be seen whether courts will respond similarly to a different type of plaintiff.
This case underscores the importance of drafting very clear bonus limitation and termination language. When drafting bonus language in an employment contract, employers should ensure that the contract:
- clearly outlines what an employee’s entitlements will be upon employment termination;
- includes examples of how limitation language will apply in various circumstances;
- satisfies the minimum standards in the ESA, including the requirement to continue all wages and benefits during the ESA notice period; and
- includes a reference to a formal written bonus plan (if any) that will govern the employee’s entitlement.
Forum: Ontario Court of Appeal
Date: January 27, 2017
Citation: Kielb v National Money Mart Company, 2017 ONCA 356 2008
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