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Many employees rely on a range of sources of compensation. More and more employees are receiving multiple streams of compensation, including base salary and incentive compensation, such as performance bonuses and access to other incentives such as stock options.

While employers are generally free to dismiss employees at any time, they must provide employees with “reasonable” notice of the termination of their employment. Employers can choose whether to provide this through guaranteeing continued employment or, alternatively, through releasing the employee but continuing to pay them as if they continued to work. Depending on the specifics of the employee’s employment, this period can last from a few weeks to years.

Because of the significant liability associated with reasonable notice, employers will often attempt to contract out of parts, or all, of the obligations associated with reasonable notice of termination. This can often include clauses such as that employees will not receive outstanding or future bonuses and/or will not be entitled to stocks or other forms of incentive compensation following the termination of employment. This is often accomplished by including language in an employment agreement which sets out that an employee must be “actively employed” to be paid any bonus or incentive pay.

Supreme Court of Canada Clarifies Test for Incentive Payments After Termination

The courts, depending on specific facts, have reached different decisions on whether an employer can limit an employee’s rights to bonus/incentive payments. The Supreme Court of Canada has recently (in Matthews v. Ocean Nutrition Canada Ltd.) provided clarity on when an employee whose employment has been terminated can claim bonus/incentive payments.

In particular, the court stated that the following test should be used in determining whether an employee is entitled to continue to receive incentive pay during any period in which they receive termination pay:

  1. Would the employee normally have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?
  2. If so, do the terms of the employment contract or bonus plan unambiguously remove or limit that common law right?

While the case addressed many details, in our opinion, the following is the most important takeaway for employees looking to protect their rights to bonus/incentive pay following termination of employment:

  • You do not need to show that a bonus or benefit is an ‘integral’ part of your total compensation to be entitled to it during the reasonable notice period
  • Unless a contract explicitly limits entitlement to a bonus (or other incentive compensation) post-termination (and this is a high standard) you are likely in a good position to continue to receive a bonus/incentive pay.
    • Employers will not be able to rely on what a court determines is a general clause, such as stating that an employee will not receive incentive compensation unless they “continue to be employed by the company”

What does this mean for you?

If your employment has been terminated and your employer has failed to pay out any bonus/incentive pay that you would have been entitled to had you continued working during your notice period, in our opinion you should consider seeking the advice of experienced employment law counsel. We suggest this because if you may be able to successfully argue that you are entitled to these payments and the amount of these entitlements can be significant.

If you are an employee with questions regarding entitlement to various elements of compensation, or in relation to termination pay, wrongful dismissal, severance, or discrimination at work, please contact Toronto employment and immigration lawyers Sultan Lawyers at 416-214-5111 or via email at mlahert@sultanlawyers.com.


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