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Active Employment Clauses Lose Their Luster

For years, employers have relied on bonus language requiring “active employment” to earn a bonus. From a company’s standpoint, this meant that an employee had to be physically working on the date of a bonus payout in order to be eligible for one. Practically speaking, this approach meant that: a) employees could be deprived of a bonus for the year in which they leave the company; and b) severance packages did not need to account for potential bonuses which could have been earned going forward.

In two separate decisions released in August 2016, the Ontario Court of Appeal threw a large bucket of cold water on this legal strategy. It ruled that “active employment” language was insufficient to hold back bonuses when it comes to severance obligations.

The reasoning is simple: had the employee been given the opportunity to actually work through a “period of reasonable notice”, the employee would have continued to earn their regular compensation. If a bonus, commission or other monetary incentive program is part of the employee’s year-to-year compensation scheme, that element must also be paid during the notice period.

The Court drew a distinction between claims for unpaid bonuses or commissions, on the one hand, and bonuses or commissions which would have been earned during the notice period, on the other hand. While an employer may potentially avoid liability for bonuses in the former scenario by using “active employment” language, the latter scenario requires far more clarity, the Court said.

From an employee’s perspective – particularly those who earn large annual bonuses – these decisions are great news: severance packages may be far more lucrative going forward.

However, employers may want to take this opportunity to rethink and redraft their bonus plans and employment contracts. We recommend at least the following two modifications:

  1. Where possible, implement legally enforceable termination provisions limiting entitlements on termination; and
  2. Draft bonus plans which clearly define active employment as including a period of reasonable (or contractual) notice, subject to any other legal obligations the company may otherwise have.

The two Court of Appeal decisions can be reviewed here: Paquette v. TeraGo Networks Inc. and Lin v. Ontario Teachers’ Pension Plan Board.