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When are Employees Entitled to a Bonus After Resigning or Being Fired?

It’s the time of year when, for some, bonuses are being paid out following the close of the fiscal year. These bonuses can be significant depending on the terms of the bonus plan. However, it’s not uncommon for employees to resign for another role or to be dismissed right before their bonus is paid out. Are they entitled to their bonus? The answer is “It depends”.

Contractual bonus entitlements vary greatly. Some bonus plans are formulaic, while others are more loosely allotted at the employer’s sole discretion. A critical component of determining an employee’s bonus entitlement is evaluating the bonus criteria and whether there are sufficiently clear terms ousting an employee’s entitlement to bonus after they leave their employment.

If there are no contractual terms limiting an employee’s entitlement to their bonus, then provided the bonus is earned (e.g. requisite individual and company performance targets are achieved), the employee is generally entitled to payment of the bonus at such time as it is usually paid out. This remains true even if the timing of the bonus payment is after the employee stops working for the employer. If an employer refuses to pay the bonus the employee can pursue a claim for breach of contract, among other things, to enforce payment of the bonus. Moreover, if the employee was terminated without cause, they may be entitled to an additional bonus payment for damages through their common law reasonable notice period.

When a discretionary bonus is “earned” is often subjective, particularly if the bonus is based on personal performance and there are no objective metrics in place. However, an employer does not have an unfettered right to exercise their discretion as they desire. They must be able to show that its discretion was exercised in a fair and reasonable manner.

When an enforceable bonus plan or bonus clause does exist, it is possible for an employee to be precluded from payment of their bonus, even if they worked the entire bonus year and achieved all requisite targets or performance levels triggering the bonus. Further, they can be precluded from receiving pay in lieu of the bonus they would have earned through their termination notice period. Common restrictive terms in bonus provisions include a requirement that, to be eligible for their bonus, the employee must be actively employed throughout the entire bonus year or that they must be actively employed on the date the bonus is paid. Also common is a term stipulating that if the employee gives notice of resignation, they are not eligible to receive a bonus even if they are employed on the date that the bonus is usually paid out (or is paid out to others).

Courts heavily scrutinize these restrictive bonus clauses and will interpret any ambiguity in favour of the employee based on the doctrine of contra proferentem, providing that ambiguous contractual language is interpreted against the interest of the party who drafted the wording (usually the employer). Further, wrongful dismissal caselaw has repeatedly found the language “actively employed”, on its own, to not be sufficiently clear to remove an employee’s entitlement to bonus. As confirmed by the Supreme Court of Canada in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, “…the remedy for a breach of the implied term to provide reasonable notice is an award of damages based on the period of notice which should have been given, with the damages representing ‘what the employee would have earned in this period’.” However, each bonus plan has unique language and a court will interpret each bonus plan based on its specific language and context of that particular case. Unfortunately, the courts have delivered several decisions with inconsistent outcomes, adding uncertainty around what a court will rule when interpretating these restrictive bonus clauses.

Occasionally incentive compensation masked as a discretionary bonus is in fact considered to be non-discretionary incentive pay or commissions, in which case these are classified as “wages” under Ontario’s Employment Standards Act, 2000; the minimum employment standards legislation applicable to provincially regulated employers in Ontario. All employees are entitled to all outstanding wages (i.e. commissions) earned up to their last day of work and through the statutory termination notice period (if applicable), among other things. When these forms of bonus or commissions are considered “earned” is another potential area of debate, which will also come down to whether the terms of the plan unambiguously restrict an employee’s entitlements to the incentive pay.

A bonus entitlement analysis played out recently in Boyer v Callidus, 2024 ONSC 20, where a retired executive was awarded more than $1.8 million in damages for unpaid and deferred bonus amounts, lost stock options and unused vacation. Craig Boyer was a Vice President at Callidus when in 2014, Callidus introduced a deferred bonus program which involved withholding a portion of bonuses earned then distributing 50% of the withheld amounts for the next two years, with interest. They also introduced a stock option plan for some employees, including Boyer. In 2015, Boyer told Callidus that he was going to retire at the end of 2016. The court ultimately concluded that Boyer retired around three months early, in September 2016. When dispute arose over the remaining withheld bonus amounts, among other things, Boyer commenced an action for specific performance and/or damages. Callidus relied on the company’s Deferred Bonus Policy which stated that an employee “must be employed by [Callidus] to receive his or her principal amount of Deferred Bonus or any interest thereon.” The court rejected that Callidus could rely on such terms as it ruled that Callidus did not bring those terms to Boyer’s attention, stating:

“Mr. Boyer’s evidence that he was not provided with a copy of Callidus’ Deferred Bonus Policy or told that he would not be paid for earned and deferred bonuses after his employment ended is not challenged. If this was a condition of Mr. Boyer’s employment, it was incumbent on Callidus to inform him of such a condition and obtain his agreement. In the absence of evidence that Mr. Boyer agreed to such a condition, I find that Mr. Boyer’s contract of employment did not include a condition that he would not be paid deferred bonuses after his employment with Callidus ended.”

Accordingly, Boyer was awarded the amount of outstanding deferred bonus and interest.

Regarding Boyer’s stock options, Callidus argued that it’s Amended and Restated Incentive Plan and their Prospectus for Initial Public Offering stated that the expiry date for any unvested portion of stock options was the date of termination of employment, except in cases of death. The court rejected Callidus’ position once again, finding that Boyer was never provided with a copy of these documents, and accepted Boyer’s evidence that he had been told by Callidus management that retirement would be treated the same way as death (stock options would vest upon retirement). Boyer’s rights to the stock options were therefore not limited by his retirement. As a result of Callidus ceasing to be a public company at the time of the pleading, the stock options awarded to Boyer could no longer be vested or exercised making the remedy of specific performance inappropriate. Instead, damages for the lost value of the stock options was awarded to Boyer based on the difference in value between the grant price of each option award and the market price as of January 16, 2017, the date the court accepted Boyer would have exercised his vested options.

Takeaways for Employees

When it comes to ensuring bonus payout upon resignation, the general rule of thumb is for the employee to remain silent regarding their intention to leave until the bonus is paid out. Even if there is no term limiting bonus entitlement after an employee leaves, the fact that the employer is aware of the employee’s intention to resign may very well lead to negative consequences, such as a reduction in the amount of bonuses awarded. While a discretionary bonus must be determined reasonably by the employer, a claim that the bonus was unreasonably determined is often difficult to prove.  

Employees that are unhappy with their bonus award should consider asking their employer to explain how its decision was made. Red flags include reasons based on subjectivity or those lacking fairness, as the bonus may be contractually owed despite their decision.

Employees must carefully review their employment agreements and incentive compensation plans before signing off on them. It is critical to understand what entitlements a departing employee may have, or more importantly, may not have, if they leave prior to a bonus being paid out. It is important to obtain clarity on any portions of the bonus plan which are not understood, before agreeing to them, as this information may impact the employee’s decision, such as whether they would like to accept an offer of employment and resign from their current role.

Seeking employment counsel on the above would greatly benefit an employee in navigating the often complex and murky waters around bonus entitlement.

Takeaway for Employers

It is imperative for employers to have extremely clear, enforceable bonus plans and employment agreements in place. These plans and agreements should be reviewed regularly to ensure any restrictive language adheres to the standards imposed by the common law and to ensure they do not breach any applicable legislation.

The Boyer v Callidus decision reiterates that an employee must be made aware of the language restricting their entitlements to bonus, including providing them with a copy of the document containing such language. Additionally, their agreement to the limiting language must be obtained if such language impacts the employee’s existing entitlement.

Moreover, employers should have a transparent process in place about how bonus decisions are made, recording all such decisions and processes. Employees are being more commonly awarded moral and aggravated damages for employer misconduct, such as the breach of the duty of good faith, and a defensible bonus determination process will assist in mitigating the risks of liability in that regard.

For an opinion on the merits and potential employer liability of a particular employee’s case or for an assessment on the validity of a bonus plan currently in place, employers should obtain legal advice from an employment lawyer.

Boyer v Callidus, 2024 ONSC 20

This blog is provided as an overview. This information is not intended as legal advice. Readers are cautioned against making any decisions based on this material alone. Specific legal advice should be obtained.


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