As employers know, the specific language of an employment contract has a significant impact on what is owed to an employee at the end of the employment relationship. Among the most important clauses in the employment contract are the termination clause, and language around an employee’s entitlement to receive their bonus after termination.

Employers are attempting to keep up with guidance from the courts on drafting enforceable clauses to limit employee bonus entitlement. In this article, after canvassing the current state of bonus entitlement during the common law notice period, we will highlight what we view as an emerging area of possible risk for employers.

Common law notice period

Where an employee is terminated without working notice, and a bonus would have been owed to that employee during the common law notice period, employers need to carefully draft their contracts in order to rebut the employee’s entitlement to the bonus if they are no longer working with the company. This is often done through restrictive language in the bonus plan or employment contract which states that bonuses will only be paid to employees who are “actively employed” at the time of payout.

However, in recent years the courts have narrowed their guidance on what limiting language is enforceable. In Matthews v Ocean Nutrition Canada Limited, 2020 SCC 26 (Matthews), the Supreme Court applied the two-part test from a prior Ontario Court of Appeal decision. Specifically, the following two questions were considered by the SCC in order to determine whether damages in lieu of notice should include bonuses:

1. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?

2. If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?

In Matthews, the Court found that the language in the Long-Term Incentive Plan did not unambiguously take away or limit the employee’s right to receive the payment. Specifically, the SCC confirmed that the “purpose of damages in lieu of reasonable notice is to put the employee in the position they would have been in had they continued to work through to the end of the notice period.” Among other issues, the Court raised that the clause of the contract which required an employee to be an “active” employee did not suffice to remove an employee’s common law right to damages. They found that if Mr. Matthews had been given proper notice, he would have been “actively employed” throughout the realization of the LTIP.

More recently, in Celestini v. Shoplogix Inc., 2023 ONCA 131, the Court of Appeal held that a termination clause which stated, “if prior to end of the Compensation Period, Shoplogix terminates Employee’s employment for a reason other than Cause, then Shoplogix shall pay to Employee the Incentive Compensation earned up to the date of termination within thirty (30) days of the effective date of termination” was unenforceable. Both the Court of Appeal and the lower court concluded that Mr. Celestini’s wrongful dismissal damages should include the bonus that would have been earned during the notice period. They found that the clause did not unambiguously oust Mr. Celestini’s right to damages in the circumstances that actually arose, that is, a without cause termination without reasonable notice.

As can be seen from the cases above, it has proven to be a tricky task for employers to draft language which limits an employee’s entitlement to bonus which the courts find acceptable.

Bonuses during the Employment Standards Act notice period

As we have seen, bonus clauses with the limiting language of requiring an employee to be actively employed at the time bonus is paid are commonplace. Often employers define “actively employed” to only encompass the period of time up until the employee’s last day of work. However, employers need to consider whether this type of strict limiting language is compliant with the Employment Standards Act (“ESA”).

Employers need to reflect on the impact of the statutory notice period under the ESA, which applies to all provincially-regulated employees in Ontario who are terminated without cause. Section 60(1) of the ESA requires that an employer not reduce the employee’s wage rate or “alter any other term or condition of employment” during the statutory notice period. Accordingly, drafting a clause which attempts to limit an employee’s entitlement to bonus amounts as of the day of termination will likely be seen by the court as an attempt to contract out of the ESA, and could render the entire clause void.

In  Kerner v. Information Builders (Canada) Inc., 2020 ONSC 2975, the contract attempted to restrict an employee’s entitlement to commissions to only those amounts from sales which had been booked and billed while the employee was still employed. The court held this was void because it attempted to contract out of section 60(1) of the ESA by altering the employee’s wage rate during the ESA notice period.  

While discretionary bonuses are not treated as wages under the ESA, even a discretionary bonus which would have been paid during the statutory notice period would be considered a “term or condition” of employment. This is particularly true if the quantum of the bonus was determined prior to the employee’s termination. Accordingly, a clause which purports to prevent an employee from receiving a payable bonus during the ESA notice period will also likely be considered an attempt to contract out of the ESA, contrary to section 5(1).

As the courts continue to refine their approach to contract clauses which limit entitlement to bonuses after termination, this will likely be an area which will be litigated further in 2023. In light of this changing legal landscape, employers should obtain legal advice and review their employment contracts regularly to ensure that they remain up-to-date and enforceable as new decisions are released and may offer new guidance.

Co-author Zoë Paddock