When an employee is terminated, they are typically entitled to reasonable notice or pay in lieu of notice. They are also typically entitled to any benefits and bonuses they would have received during their notice period. Therefore, knowing exactly how long the reasonable notice period will be is important. Sometimes, this would need to be determined by a court if the contract terms are unclear or there is a dispute between the parties. Bonuses are highly dependent on the terms of a bonus plan, usually set out in the contract or a related policy created by the employer. To calculate the bonus after termination, the court must have a clear picture of how the policy works to determine how much the employee would be entitled to. 

In this post, we will discuss how an employee bonus may be calculated after termination. We will examine a case example, Jimmy How Tein Fat v. PRGX Canada Corp., 2023 ONSC 6374, in which the court analyzed the employment contract to determine how to calculate the employee’s bonus after termination. This post will shed light on how the terms of a bonus policy in an employment contract may be interpreted. This will provide key takeaways for employees seeking to understand their rights on bonuses after termination and for employers who want to understand how terms in their employment contract may be interpreted in terms of bonuses for an employee, including a terminated employee. 

Are employees entitled to their bonus upon termination?

Beyond an employee’s base salary, they may also expect to receive certain benefits or a bonus while working for their employer. At common law, an employee is entitled to any bonuses that they would have earned during the reasonable notice period. However, this is not the case if a bonus plan is removed on termination, according to the employment contract terms. To effectively remove entitlement to a bonus plan on termination, the contract must make these terms unambiguous. In other words, if the contract terms are vague in terms of whether a terminated employee would be entitled to a bonus, then it is presumed that they will receive the bonus they would have earned during their reasonable notice period. 

The courts have ruled that if the contract specifies that the employee needs to be “full-time” or “active” to receive the bonus, this is not enough to remove the employee’s entitlement to a bonus on termination. This is because they would have been “full-time” or “active” employees during the reasonable notice period and would therefore be entitled to any earned bonuses. There needs to be further terms in the contract that clarify that an employee’s rights to a bonus are removed during the reasonable notice period. 

How are bonuses calculated after termination?

If an employee is found to be entitled to a bonus after they are terminated, the next question is how this bonus will be calculated.

In some cases, a bonus may be discretionary but still requires the employee to fulfill certain criteria to earn it. In other cases, a bonus may be directly tied to the company’s financial performance, as was the case in how, described below.

Suppose there is a dispute on the bonus for the terminated employee. In that case, parties should provide evidence of any terms referring to the bonus policies, whether they are defined in the contract or related documents. If the employee’s bonus is related to the financial performance of the company, there may need to be evidence provided on this point as well in order to calculate whether the employee meets that eligibility requirement for the bonus or if the bonus is scaled to the company’s performance overall. The court will also need to carefully consider whether the employee has met all of the eligibility requirements set out in the plan. 

Employee Entitled to Bonus for Company’s Performance After Termination 

In the How case, the employee had worked with the employer for 29 years. The employee was 63 at the time of termination. He was initially an accountant but received several promotions throughout his career. By 2019, he became the company’s VP of Operations and Innovation. The employer was a company that specialized in auditing, which was recognized by the court to be a very niche market. He had also immigrated from England and had only worked for the employer during his time in Canada. The employee was terminated as a result of a restructuring of the company. Due to these factors, the court decided that he was entitled to a reasonable notice period of 24 months. 

In 2016, the employee became eligible to participate in the company’s bonus plan for senior employees. The bonuses would be triggered if the company met certain financial targets. The bonuses were to be calculated on a range of 50% to up to 100% of his base salary, depending on the performance targets being met across the company and within his department.

The employer claimed that the employee would only be entitled to the bonuses set out in the plan if the employee was “actively employed” when the plan proceeds were distributed. Therefore, the employer claimed that the employee would not be entitled to the bonus as they were not employed when it became payable. They also claimed that the bonus was discretionary, but the court found no evidence that it was a discretionary bonus. 

Since the bonuses were based on the company and the employee’s department’s financial performance, the court found that the bonus could be calculated. During testimony, evidence was also provided on what this amount would be for the employee. The Chief Human Resources Officer also confirmed that the employee would have been entitled to this bonus of approximately $260,000 if he had been still employed with the company. 

While the policy stated that an employee would only receive the bonus if they were still employed with the company, the court found that the employee would have received the bonus if they were still employed during the reasonable notice period of 24 months. Therefore, the employee was awarded the bonus as part of his wrongful dismissal damages.

Contact Haynes Law Firm in Toronto for Advice on Termination and Wrongful Dismissal Claims

Employers and employees should carefully consider the termination clauses set out in the employment contract, as there are significant consequences if the clauses do not comply with legislative standards, including a potential wrongful dismissal claim. Our experienced employment law legal team at Haynes Law Firm in Toronto can assist you with issues that arise from termination. For employees, our goal is to ensure that they understand their rights and receive maximum compensation in wrongful dismissal cases. Haynes Law Firm also assists employers in avoiding liabilities that may arise from terminations that are not permitted by the legislation. We are dedicated to finding the best resolution for you.

To book a consultation, please contact us online, or by phone at 416-593-2731.