The Contractual Requirement of “Active Service” Does Not Alter or Remove An Employee’s Right To Compensation For Bonus Payments During the Reasonable Notice Period.

The Ontario Court of Appeal recently confirmed that the contractual requirement for employees to be “actively employed” to receive their regular bonus payments or other employment benefits is not sufficient to displace an employee’s right to common law damages for breach of contract in wrongful termination cases.

In Paquette v. Terago Networks, 2016 ONCA 618, the court made clear that, in calculating common law damages, only contractual language that unambiguously alters or removes an employee’s common law rights may be sufficient to exclude compensation for an employee’s bonus.

Mr. Paquette was terminated from his employment with Terago Networks. On a summary judgment motion, the court initially denied Mr. Paquette compensation for lost bonuses as part of his common law damages, reasoning that his employer’s bonus plan required employees to be “actively employed” at the time the bonus was to be paid (Paquette v. Terago, 2015 ONSC 4189 at para. 64).

On appeal, the Court of Appeal clarified that the proper approach in a wrongful termination claim is to first consider the damages suffered by the employee based on their complete compensation package, including bonuses and other benefits, and then assess whether the terms of any contract alter or exclude the employee’s common law rights.

Of particular significance in Paquette is the court’s statement that “[a] term that requires active employment when the bonus is paid, without more, is not sufficient to deprive an employee terminated without reasonable notice of a claim for compensation for the bonus he or she would have received during the notice period, as part of his or her wrongful dismissal damages.”

The court relied on its earlier decision in Kieran v. Ingram Micro Inc., 2004, 33 CCEL (3d) 157 (ONCA), for guidance on the type of language that may displace an employee’s right to full compensation. In Kieran, the issue was whether a terminated employee could exercise stock options during a reasonable notice period. The stock option plan required employees to exercise their options within 60 days of termination. The Court of Appeal held that this language was sufficient to remove the employee’s entitlement under common law because the plan defined “termination of employment” as “the date the employee ‘ceases to perform services for’ the employer ‘without regard to whether the employee continues thereafter to receive any compensatory payments therefrom or is paid salary thereby in lieu of notice of termination.’”

In Paquette, the Court of Appeal reaffirmed its decision in Kieran, indicating that similar precise language in an employee bonus plan may be sufficient to displace the employee’s common law right to compensation for bonuses that would have otherwise been payable during the reasonable notice period. The court, however, explicitly declined to decide whether the same test for stock options applies to bonuses.

Prior to Paquette, case law was mixed regarding the contractual language necessary to exclude bonus payments during a reasonable notice period. Many employees may mistakenly believe that the “actively employed” language in their benefit plans prevents them from claiming compensation for bonuses or other benefits during the notice period.

As a result, terminated employees should always seek legal advice to confirm their rights to notice or compensation in lieu of notice. Similarly, employers should consult legal counsel when drafting employment agreements and related policies. In the wake of Paquette, many employers who believed themselves protected by the “actively employed” language in their bonus or benefit plans will now need to reassess their policies, as the Court of Appeal has determined that this language alone is insufficient.