When an employer terminates the employment relationship without just cause, the employee is entitled to a reasonable period of working notice or pay in lieu of notice.
Judges have asked, “What is a reasonable period of time that it would take for this employee to find alternative employment?” They have determined what is reasonable based on (i) employee age, (ii) duration of employment, (iii) character of employment, and (iv) availability of similar employment opportunities.
The reasonable notice period is the basis for what an employee is entitled to when their employment is terminated. As a general rule, a terminated employee is entitled to the same total compensation they would have received had their employment continued for the duration of the notice period.
But what about bonuses—are they considered part of the overall compensation package, and thus rightly owed to a former employee as part of their compensation in lieu of notice?
Past Approach
In older decisions, the answer was often “no”. For instance, in Bardal v. Globe & Mail Ltd. [1960] O.J. No. 149 (H.C.)—the case that gave us the factors for determining the appropriate notice period—the terminated employee’s bonus was excluded from their notice entitlement. The bonus was seen as “a purely voluntary gift distributed among the employees as a matter of good will between employer and employee” (page 146).
Current Approach
More recently, incentive programs have become more important to employees, forming an integral part of the overall compensation package. As such, courts have seen fit to include them as part of what is owed in lieu of notice.
Matthews v Ocean Nutrition
Just this year, the Nova Scotia Supreme Court ruled on the issue in Matthews v. Ocean Nutrition Canada Ltd., 2017 NSSC 16[1]. There, a fifty-year-old manager in a highly-specialized field who had worked for the employer for fourteen years was awarded a reasonable notice period of fifteen months.
As part of what was owed in lieu of notice, the employee claimed payments he would have received as part of the Long-term Incentive Plan (“LTIP”) and Management Short-term Incentive Plan (“STIP”). The LTIP provided eligible employees with a lump-sum payment, relative to the valuation of the company, in the event that the company was sold. The STIP was a traditional bonus program: an amount to be paid relative to certain company targets, subject to the Board of Directors’ approval.
Active Employment Requirement
The employer argued that the plans required the employee to be “a full-time employee” at the time the incentives would be paid out, therefore a person whose employment was terminated before the payments became due was not entitled to them.
The Court rejected this argument, re-affirming that the purpose of notice entitlements is to compensate the employee for the compensation they would have received had they continued to be employed for the full duration of the notice period. In the words of Leblanc J, “Had Matthews not been constructively dismissed, he would have been a full-time employee when the [incentive program] payouts were made” (para 398). The employer had not limited this entitlement through “clear and express language” in the employment contract (para 389).
Integral to the Compensation Package
The employer also argued that the incentive programs were not integral to the employee’s compensation package. The LTIP, it said, is a highly uncertain form of compensation, and was too speculative to be considered integral to the compensation package. The STIP, as in Bardal above, was said to be an employer gratuity and therefore not owed as part of reasonable notice.
The court rejected these arguments, finding that both incentive plans formed part of the employee’s contractual compensation package. The LTIP had been the “primary reason” the employee had stayed with the company as long as he did (para 388). Even though the STIP was discretionary, it had been paid out every year that the targets were met. These amounts would have been paid had the employment relationship continued during the period of reasonable notice.
Conclusion
Incentive programs will form part of the reasonable notice entitlement where they are integral to the compensation package, except where the employment contract contains clear and express language to the contrary.
Written by Pink Larkin’s articled clerk Jason Edwards. For more information please contact Pink Larkin.
#WorkLawWednesday: every second Wednesday Pink Larkin answers general questions about employment and human rights law. This is not intended to be legal advice and should not be relied on as legal advice