The Bhasin effect on post-termination bonuses

In the last year, three cases, two from Ontario and one from Alberta, have created confusion and inconsistency in the Canadian courts with respect to post-termination bonus payments.
The general rule is an employee who is dismissed without reasonable advance notice of termination is entitled to damages for breach of contract based on the employment income the employee would have earned during the reasonable notice period (see Sylvester v. British Columbia).

However, whether a bonus or other benefit is payable during the period of reasonable notice depends on the language of the plan and on whether the bonus has become an integral part of the employee’s annual salary. If so, then the employee is entitled to the bonus or benefit. But, if there are contractual terms limiting the payment of the bonus, those terms govern (see, for example, Kieran v. Ingram Micro Inc.)

Paquette v. TeraGo Networks Inc. and Lin v. OTPPB are the two Ontario cases, released days apart, in June 2015 which cause confusion. Both Paquette and Lin:

• concerned the treatment of annual incentive plan payments and long-term incentive plan payments during the period of reasonable notice;
• accepted that whether a bonus or other incentive was payable during the reasonable notice period depended on the language of the plan, if any, and upon whether the bonus had become an integral part of the employee’s annual salary;
• had plans with express language stipulating that the employee had to be actively employed on the date of payment; and
• concluded that the incentive payments were integral components of compensation.

Yet, the Ontario Superior Court of Justice reached opposite results.

Lin, released on or about June 1, 2015, examined an entitlement to AIP and LTIP, post-termination. Lin’s employment was terminated on a without cause basis prior to the payment date. The employer argued that pursuant to the contract, Lin had to be actively employed at the time of payment to be eligible for a payment.

The court disagreed and adopted the reasoning of Justice Kiteley in Schumatcher v. Toronto Dominion Bank, stating that an employee’s:

…involuntary inability to comply with the condition of the PCP [Performance Compensation Plan] ought not to be justification for the Bank in declining the award of the bonus as part of Schumatcher’s [the employee’s] damages. If that were the case, an employer would achieve a significant advantage by wrongfully terminating an employee because the severance package would not have to include any bonus. Where the bonus was promoted as an integral part of the employee’s cash compensation, it would be inappropriate and unfair to the employee to be deprived of the bonus by reason of the unilateral action of the employer [emphasis added].

So, despite express language requiring Lin to be employed on the date of payout, he received a pro-rated AIP, proportional to his notice period, in the amount of $300,000.

Less than a month later, on or about June 29, 2015, the Ontario Superior Court released Paquette. Paquette had been employed by TeraGo Newtorks Inc. in Calgary, Alberta, for about 14 years. He was terminated without cause. Pursuant to the bonus plan, an employee had to be “actively employed by TeraGo on the date of the bonus payment” to be eligible for a bonus. Paquette’s employment ended in November, and the next bonus payment was not until February.

The Ontario Superior Court of Justice reached the opposite conclusion from Lin, and determined that the limiting language in the plan was clear, unambiguous, and sufficient to deny Paquette a bonus payment when his employment was terminated without cause prior to payday: “Mr. Paquette may be notionally an employee during the reasonable notice period; however, he will not be an ‘active employee’ and, therefore, he does not qualify for a bonus.”

In October 2015, things got even more perplexing when the Alberta Court of Queen’s Bench released Styles v. Alberta Investment Management Corporation. Styles added a new angle to the analysis — the obligation of good faith in the evaluation of post-termination bonus eligibility. While this is not a brand new concept, it is the first time we’ve seen an application of Bhasin to post-employment incentive payments.

In Styles, the company’s LTIP had language stating an individual must be actively employed at the time of vesting in order to receive an LTIP grant. Styles’ employment was terminated prior to his LTIP fully vesting.

Styles essentially picked up on the argument made in Schumatcher, above, but took it further. Styles argued that the LTIP grants were wages which formed part of his compensation package and that the company was acting in bad faith by refusing to pay. The Alberta Court of Appeal determined that the employer had exercised its discretion in the decision to terminate Styles, and, relying on Bhasin and the “duty of good faith” in contractual dealings, recognized that the employer had an obligation to use its discretionary power fairly, honestly, and with regard for Styles’ interests.

Essentially, even though the employer’s decision to terminate on a without cause basis was permitted, the decision to deny Styles LTIP post-termination, a termination they brought about, was unreasonable, and could not stand. Styles received $444,205.

Though there are clearly differences between the three cases, they highlight an ongoing discrepancy in application which is difficult to reconcile.

It is still imperative to include the condition of active employment in AIP and LTIP plans; but employers should know that we are in a period of inconsistency and unpredictability. Denying incentives post-termination may not be as clear-cut as one thought and may give employers pause with respect to the treatment and timing of without cause terminations.

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