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Can Negative Performance Affect Bonus Owed to an Employee During the Reasonable Notice Period?

Can Negative Performance Affect Bonus Owed to an Employee During the Reasonable Notice Period?

By December 20, 2019March 4th, 2022No Comments

As regular readers would know, if an employee has been terminated without cause, and the employee’s contract does not contain language limiting entitlements at termination to statutory minimums, that employee is owed reasonable notice of termination or pay in lieu thereof. The legal jargon for this is “common law notice.”   


The common law notice period is the period of time that a court determines a terminated employee would reasonably need to secure alternative, similar employment. Generally, the notice period consists of one month for every year of service. The notice period can fluctuate based on the principles established in Bardal v. Globe & Mail Ltd. Per the Bardal principles, a greater reasonable notice period can be awarded to an employee having regard to the character of the employment, the employee’s length of service, the employee’s age and the availability of alternative employment. 


What many employees do not know is that reasonable notice payments are not limited to an employee’s base salary. As a matter of legal principle, reasonable notice payments are meant to put the employee in the same position they would have been in had the employer given them adequate notice. If the employee would have received the payment during the reasonable notice period, they will be owed the amount in any payment received in lieu of notice. Accordingly, an employee is entitled to all non-discretionary payments that he or she was earning while employed. Non-discretionary payments include bonuses, benefits, sales commissions, retirement plan contributions and stock options. 

Non-Discretionary Bonuses

Uncertainty arises where the contract provisions or policies governing non-discretionary bonus payouts specifically limit an employee’s entitlement to the bonus payments upon termination.  Some diligent employers will make specific provisions that preclude payment of non-discretionary bonuses that the employee would have earned during the reasonable notice period. The enforceability of such clauses is contentious, and courts have struggled to stick to a unifying principle. The confusion recently prompted the Supreme Court of Canada to hear an appeal on the issue in October 2019. That decision has yet to be reported. 


In the meantime, the Court of Appeal for Ontario’s decision in Paquette v TeraGo Networks Inc. is widely regarded as the leading case on the subject. The Court established a two-part test to determine if an employee was entitled to receive bonus payouts they would have earned during the reasonable notice period:

  1. Was the bonus an integral part of the employee’s compensation package, triggering a common law entitlement to damages in lieu of bonus? Factors relevant to this analysis include:
  1. Whether the bonus was received each year (albeit not necessarily in the same amount);
  2. Whether the purpose of the bonus was to remain competitive with other employers;
  3. Whether the bonuses were historically awarded, and the employer had never exercised its discretion against the employee; and
  4. Whether the bonus constituted a significant component of the employee’s overall compensation.
  1. If so, is there any language in the bonus plan that would restrict the employee’s common law entitlement to damages in lieu of a bonus over the notice period?

Non-discretionary bonuses which have been regularly provided in the past in regular amounts are considered to be integral to the contract of employment and will be included in the calculation of pay in lieu of reasonable notice. Further, for step 2, courts require clear and express language that purports to restrict the employee’s common law entitlements. 


Performance During Reasonable Notice Period

Some crafty employers have made the argument that the dismissed employee is not entitled to bonus payments because their performance leading up to termination was poor, and if they had continued working during the reasonable notice period, they would not have received the bonus payments. 

Employers who have made this argument have been unsuccessful in their attempts to limit their liability. Courts have generally sided with the employee in awarding damages for bonuses that would have been paid to them during the reasonable notice period. Courts have looked to several factors in deciding in favour of the employee, the most common being whether the employee received the bonus in previous years. 

Case Law 

In Schultz v. Canada Lands Company CLC Limited, the Employer argued that even if Mr. Schultz was given reasonable notice, he would not have been eligible for a bonus during that time in view of the bonus policy, which indicated that employees who received “partially meets expectation” (or worse) as a performance review rating were not eligible to receive a bonus. They argued that Mr. Schultz would have received a poor review rating and therefore, would not have been eligible for a bonus. The Court found several problems with this argument. 


First, Mr. Schultz was never advised of these limiting criteria. His offer letter indicated only that he would be eligible for a bonus of up to 25% of his salary. No limiting criteria were mentioned to him. Secondly, Mr. Shultz never received a “partially meets expectations” rating. In his last performance review, Mr. Shultz received an overall rating of “successful”. The Court found that it was speculative to suggest that he would have necessarily received a rating that would have prevented him from receiving the bonus. Further, and perhaps most importantly, the evidence indicated that Mr. Schultz received a bonus each year he was employed. Consequently, the Court rejected the Employer’s argument and decided in favour of the employee in awarding him damages for loss of bonuses. 


In Eberle v. Sunhills Mining Limited Partnership, the Court held that the employee was entitled to compensation for the lost bonus. The Employer cited performance issues and target levels that it argued should limit the bonuses payable to the employee. The Court accepted that though there was a negative review shortly before termination, it was difficult to see what impact this might have had on an assessment of Mr. Eberle’s performance levels. Moreover, it was not consistent with performance reviews over the preceding years.

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