In Ontario, employees may be entitled to their pro-rated bonus if terminated without cause. Bonus entitlements depend on several factors including whether common law entitlements apply, the terms of the employment contract, and the nature of the bonus plan.
What is a pro-rated bonus?
A pro-rated bonus refers to the portion of an employee’s annual bonus that they would have received up to the time of termination. Because the full bonus payout date sometimes occurs after the employee is terminated, the bonus would be reduced by the period between the termination date and the payout date.
For example, if an employee is terminated in June and their yearly bonus period runs from January to December, they may be entitled to approximately 50% of their annual bonus – the period between June and December.
When are employees entitled to a pro-rated bonus upon termination?
The Language of the Employment Contract
It is critical to speak with a lawyer to carefully review the language of your employment contract and bonus plan. If the terms of your employment contract or bonus plan do not clearly and lawfully exclude bonus payments after termination, then the employee may be entitled to a pro-rated amount.
However, if the contractual language explicitly excludes bonuses after termination, the employee may not be entitled to a pro-rated bonus. For example, the employment contract may foreclose bonus payments upon termination by stating that the employee must be “actively employed on the bonus payout date.”
Common Law Termination Entitlements
Employees terminated without cause may be entitled to a pro-rate bonus if they are owed reasonable notice under common law, rather than the statutory minimum entitlements under the Ontario Employment Standards Act, 2000 (ESA).
A valid employment contract may specify that the employee is only entitled to the minimum termination entitlements under the ESA, which do not include pro-rated bonus payments. However, an employment contract may be voided for infringing the ESA, resulting in the employee being owed common law termination entitlements that could include a pro-rated bonus.
Under common law, damages for wrongful dismissal typically include all compensation the employee would have earned during the notice period, including salary, benefits, and bonuses. Thus, if the employment contract’s terms are invalid, the employee may be entitled to reasonable notice at common law, which could include a pro-rated bonus.
The Integral Nature of the Bonus
Some bonuses are “discretionary,” providing the employer with the choice of whether to pay bonus amounts to employees. Determining whether a terminated employee would have received a discretionary bonus can be difficult.
When it is uncertain whether an employee would have received a discretionary bonus during the reasonable notice period, courts often assess whether the bonus is “integral” to the employee’s compensation. This means that courts will consider factors such as the following about the employee’s discretionary bonus:
· Whether the bonus was regularly received;
· Whether the bonus was a significant portion of the employee’s overall compensation; and
· Whether the bonus was expected as part of the employee’s overall remuneration package.
If these three factors apply, then a bonus, even if labelled “discretionary,” may be considered integral. Consequently, the employee may be entitled to a pro-rated bonus under their common law reasonable notice entitlements.
Takeaways
Common law reasonable notice entitlements may provide terminated employees with unpaid bonus amounts they would have received if they were not terminated. Even if a bonus is discretionary, it may still be owed under common law if it is a regular, significant, and expected part of an employee’s overall compensation.
Before signing a severance package, employees should speak with a lawyer at Emerge Law PC to know all their rights and entitlements when terminated.
Thank you to Fotini Sioukas and Ephraim Barrera for their contribution to this article. The contents of this article are not to be construed as legal advice. Contact Emerge Law’s lawyers for legal assistance.