This week, the Supreme Court of Canada released a much-anticipated decision clarifying whether a constructively dismissed employee was entitled to the bonus he would have received during his reasonable notice period.

At issue was an almost $1.1 million bonus resulting from the employer’s incentive plan.

Employee Sues for Constructive Dismissal and Bonus

The employee had worked for the employer (and its predecessors) from January 1997 to June 2011. He began as a manager and eventually became vice-president.

In 2007, the employer had created a long-term incentive plan, under which 2% of the employer’s value created on the sale or public offering of the company in excess of $100 million would be distributed among the executives. The plan also provided that if the employee was not employed by the company at the time of the sale he would not be entitled to share in the proceeds, whether he resigned or was wrongfully dismissed.

The employee was entitled to the plan during his employment.

However, following a change in management and a reduction of his duties, the employee resigned on June 24, 2011.

In June 2012, the employer was acquired by another company; the total enterprise value of the sale was $540 million.

The employee sued the employer for wrongful dismissal seeking damages for breach of his employment contract, including the loss of the long term incentive plan.

Lower Court Awards Bonus, Court of Appeal Disagrees

The hearing judge found that the employee had been constructively dismissed and was entitled to 15 months’ notice.

The hearing judge therefore found that, despite the employee not being employed with the company at the time of the sale, he was still entitled to recover under the long term incentive plan because the 15 month notice period overlapped with the sale of the company.

As a result, the hearing judge found that the employee was entitled to receive approximately $1.1 million under the plan.

However, the Court of Appeal found that the hearing judge had erred in awarding damages pursuant to the long term incentive plan, finding that the plan’s term precluded such an award because the employee was not employed by the company at the time of the sale. The court otherwise agreed with the hearing judge’s findings.

As a result, the Court of Appeal upheld the finding of constructive dismissal and 15 months reasonable notice, but set aside the $1.1 million bonus awarded under the long term incentive plan.

Supreme Court of Canada Give Bonus to Employee 

The Supreme Court of Canada stated that courts must ask two questions when determining whether the appropriate quantum of damages for a breach of an implied term to provide reasonable notice includes bonus payments:

  1. Whether, but for the termination, the employee would have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period; and
  2. If the answer to the first question is positive, whether the terms of the employment contract or bonus plan unambiguously take away or limit that common law right.

This court explained that such an approach accords with basic principles of damages for constructive dismissal, anchoring the analysis around reasonable notice. When an employee sues for damages for constructive dismissal, they are claiming for damages as compensation for the income, benefits, and bonuses they would have received had the employer not breached the implied term to provide reasonable notice. The court stated that damages for wrongful dismissal are designed to compensate the employee for the breach by the employer of the implied term in the employment contract to provide reasonable notice of termination, but there is no such implied term of the contract to provide payment in lieu. As a result, the payment in lieu is not damages for a breach of the contract, but rather one component of the compensation provided for in the contract. If an employer fails to give proper notice or pay in lieu, the breach is in the failure to pay, not in the termination.

Applying these principles to the case at hand, the court explained that to determine whether the employee’s damages included an amount to compensate him for his lost bonus payment under the long term incentive plan, the focus had to be on what damages were appropriately due for the employer’s failure to provide the employee with reasonable notice and not on whether the terms of the plan were plain and unambiguous. The issue was not whether the employee was entitled to the bonus in itself, but rather what damages he was entitled to and, specifically, whether he was entitled to compensation for bonuses he would have earned had the employer not breached the employment contract.

The court found that because the sale of the employer occurred during the employee’s notice period, but for his dismissal, he would have received a bonus payment during that period. As a result, there was no need to ask whether the bonus payment was integral to his compensation, because  the employee was prima facieentitled to receive damages as compensation for the lost bonus. Additionally, on the second question, the long term incentive plan did not unambiguously limit or remove the employee’s common law right.

The Supreme Court of Canada therefore concluded that had the employee been given proper notice, he would have been full‑time or actively employed throughout the reasonable notice period.

As a result, the court found that the employee should have been awarded the bonus amount as part of his common law damages for breach of the implied term to provide reasonable notice.

The Supreme Court of Canada therefore allowed the appeal, setting aside the Court of Appeal judgment and restoring the hearing judge’s decision.

For Help

The Kitchener-Waterloo employment lawyers at Petker Campbell Postnikoff have many years of experience advising non-unionized employees and employers on a variety of workplace issues, including harassment and termination. Our team will walk you through the details of your dispute, advise you on your rights, responsibilities and obligations, and help you understand your options. If your dispute cannot be settled through negotiation, we can represent you through mediation and the court process.

We represent clients throughout southern Ontario, including the communities of Cambridge, Guelph, Elmira, Brantford, Fergus, Elora and the surrounding area. Call 519-886-1204 or contact us online for a consultation.