Employer’s Unilateral Change of Bonus Provisions Unenforceable

The Ontario Superior Court recently awarded 30 months’ notice period and bonus payments in full during that notice period to a long-service employee. The Judge noted that termination without cause in this case resulted in forced resignation as comparable employment was not available for the 62-year-old employee who had devoted 37 years to the company, and was therefore entitled to 30 months’ notice period. Moreover, the altered conditions of employment whereby bonus payments would only be payable if employed on date of payout was struck down as it was not appropriately communicated to affected employees-as the Judge noted that posting on the intranet is insufficient.

What Happened?

Commencing employment in 1978, an employee continued to work for the same employer for 37 years until he was terminated without cause at age 62 on October 8, 2015. During his employment, he received bonus payments in addition to his base salary, which was an integral part of his compensation structure. However, the bonus incentive plans were unilaterally changed by the employer in 1998 and again in 2006 to the effect that employees forfeit their right to bonus payments if not employed during the time when bonus payment is issued the following year. Management communicated the new Long-Term Incentive Plan (LTIP) and Short-Term Incentive Plan (STIP) to employees by explaining how bonus will be calculated but directed employees to read the rest of the changes on their own as posted on the workplace intranet.

Most interesting is the timing, such that the employee was terminated without cause at age 62 and was denied receiving his 2014 LTIP and STIP compensations in the amount of $379,585.

While the employee’s claim includes punitive and moral damages, these matters will require a trial. At this point, both parties seek partial summary judgment limited to the issues of determining the appropriate notice period and the employee’s entitlement to bonus compensation under the LTIP and STIP.

What Are The Parties Claiming?

The employee claims he is entitled to 30 months’ notice and full LTIP and STIP bonus payment in that notice period. While the employer conceded that termination was without cause and that the employee is entitled to compensation in some amount, the employer argued that the notice period should be only 24 months and the LTIP and STIP payment is limited to a terminal amount.

What Is Reasonable Notice When A Long-Service Employee Is Near Retirement?

The Ontario Superior Court reiterated that

“[R]easonable notice is often referred to as the period of time it should reasonably take the terminated employee to find comparable employment,” and that “As a general principle, 24 months has been identified as the maximum period in most cases.” However, it is important to recognize that each case is unique. Accordingly, principles applicable to reasonable notice include age of the employee, character or nature of the employment, length of service to the employer, and availability of similar employment, having regard to the experience, training and qualifications of the employee.

In this case, the particular circumstances of the terminated employee must be considered in light of society’s changing attitude regarding retirement whereby many employees continue working past age 65. The employee had devoted 37 years to the same employer and was part of the senior management team, only to be terminated without cause at age 62. The Court acknowledged that the employee’s age is a significant factor which substantially decreases similar employment opportunities as demonstrated by his mitigation efforts. Further, the Court held that the employee would likely have worked with the same employer to a later retirement age than an earlier one. When there is no comparable employment available, termination without cause is tantamount to a forced retirement.

As per the employee’s position in litigation, the Court granted him a 30 month notice period. The Court noted that the employee should have been allowed to retire on his own terms, especially since comparable employment opportunities are not available, and felt this case would have warranted a minimum 36 month notice period.

Can Employers Withhold Bonus Payments At Termination?

Here, the employer changed the bonus incentive plans sometime in 1998 and again in 2006 whereby employees forfeit their right to bonus payments if not employed during the time when bonus payment is issued the following year. The starting point in the Court’s analysis was informed by Paquette v TeraGo, 2016 ONCA 618 where it was held that

“[D]amages for wrongful dismissal may include an amount for a bonus the employee would have received had he continued in his employment during the notice period, or damages for the lost opportunity to earn a bonus. This is generally the case where the bonus is an integral part of the employee’s compensation package.” On that basis, the employee would be entitled to full compensation under the bonus incentive plans during the 30 months’ notice period.

1. Did Employer Communicate The Changed Terms of Employment?

While an employer can unilaterally change the conditions of employment, the employer must communicate the changed conditions with the employee in order for the changes to be valid. In this case, the employer only highlighted how the bonus payments would be calculated but failed to bring the forfeiture provisions to the employee’s attention. To this, the Court clarified that “posting on the intranet is insufficient” especially in the absence of an electronic record or a memorandum. Employers must pay attention to the method of delivery of such a significant document. The employer’s failure to inform the employee of the changed conditions of employment resulted in the employee being unaware of the forfeiture clause, which rendered it unenforceable.

2. Were The Bonus Payments Discretionary Or An Integral Part Of The Compensation?

Though the employer claims that bonus payments were discretionary, the Court did not agree. The employer made use of experts in assembling the bonus compensation package in order to provide an incentive for employees to produce, which then enables the company to meet its goals and targets of being placed in the 75th percentile in the industry. Moreover, the employer described the purpose of the bonus plan as “….an integral component of [the company’s] executive cash compensation strategy consisting of a base salary program, short term (annual) incentives and long term incentives.” Arriving at the same conclusion on this issue as in Schumacher v. Toronto Dominion Bank (1997), 147 D.L.R. (4th) 128 (Ont. Gen. Div.), aff’d (1999), 173 D.L.R. (4th) 577 (O.C.A.), leave refused [1999] S.C.C.A., the Judge cited,

“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 … [the employee] remains entitled to consideration of a bonus, both for the period he worked and the notice period.”

3. Were The Changes Unilateral?

In general, where an employer makes a unilateral change to a condition of employment, the employee has three options available in those circumstances:

(i) accept the change either expressly or implicitly through acquiescence, thereby continuing employment under the new terms;

(ii) reject the change and sue for damages if the employer insists on enforcing the new terms; or

(iii) make it clear to the employer the new term is rejected, in which case the employer may respond by terminating the employee with proper notice and offering re-employment on the new terms.

An employer can unilaterally determine terms of employment, but certain conditions apply. Here, the forfeiture clause was a fundamental change, but the employee was unable to exercise any of the above options as the employer had failed to meet its duty to communicate the changed forfeiture terms of employment.

4. Unambiguous Alteration of Employer’s Common Law Rights

Making matters worse, the changed terms of employment were not even worded clearly making the provisions very confusing to understand. The Court found that the language used in the bonus plan incentives did not meet the requirement of unambiguous alteration of common law right of payment.

5. Employment Standards Act

The forfeiture clause in the bonus incentive plans required the employee to provide a comprehensive Release of all claims. When the employee refused to sign the Release, the employer declined to pay even a pro-rated bonus. Though the employer argued that obtaining a Release is “wise corporate practice,” such requirements cannot stand when it results in a contravention of the Employment Standards Act. Thereby, the Court struck down the provision requiring the Release.

Partial Summary Judgment

Ultimately, the Ontario Supreme Court held in this partial summary judgment that the employee is entitled to a notice period of 30 months and entitled to both LTIP and STIP payments in full during that notice period.

Takeaway For Employers

When intending to implement a change to the essential terms of employment or to terminate an employee without cause, employers should be diligent in understanding how the particular circumstances of their unique employment relationship impacts their legal duties and requirements. This case made it clear that communication of the changed terms to the employee is very important-failing which can result in the changed terms to be struck down and unenforceable. Moreover, care must be taken in the method of communication as posting on the intranet is not sufficient. The changed terms must be expressly brought to the employee’s attention, and diligent employers will ensure that an acknowledgement is signed.

Though termination without cause is legal, it is complicated when it concerns a long-service employee of 37 years who is terminated at age 62 as it leaves him with little employment opportunities elsewhere and essentially forces retirement. There is no longer a cookie-cutter approach, and employers must take a holistic approach when assessing termination situations and factor in all the considerations that make the situation unique and act accordingly.

Upon the termination of an employee, the employee’s entitlement to a discretionary bonus payment often becomes a contentious matter. Employees may claim that they are entitled to all or a portion of a bonus as part of their comprehensive termination package. The common law presumption is that terminated employees are entitled to pay in lieu of reasonable notice based on their total compensation. If a bonus is found to be integral to an employee’s compensation, then he or she will have a claim for it as part of a wrongful dismissal action. Language in the employment contract must be clear and properly communicated with the affected employees in order to rebut the common law presumption of total compensation.