legal words
The Enforceability of
Bonus Forfeiture Provisions
EMPLOYERS NEED TO ENSURE CLEAR, UNAMBIGUOUS LANGUAGE IN CONTRACT TERMS
Some employers may choose to incorporate a bonus forfeiture
provision into the terms of their employment
contracts or bonus plans. The typical intent of a forfeiture
provision is to limit an employee’s bonus entitlement to
periods of active employment.
Two recent Court of Appeal decisions, Lin v. Ontario Teachers’
Pension Plan Board (“Lin”) and Paquette v. TeraGo Networks
Inc. (“Paquette”), have impacted the enforceability of bonus forfeiture
provisions in Ontario. These two cases have awarded
bonuses over the common law notice period to terminated employees
despite the presence of bonus forfeiture provisions in
their contracts.
In Paquette, the employer relied on the bonus forfeiture provision,
which required participants to be “actively employed on the
date of the bonus payout,” to avoid a bonus payout during the reasonable
notice period. At the Superior Court of Justice, the court
found that a bonus was an “integral” part of the employee’s compensation,
but nonetheless denied payment of the bonus because
the contract specifically stated that entitlement was based on “active
employment.”
In August 2016, the case went before the Ontario Court of
Appeal, where it was subsequently overturned. The Court of
Appeal concluded as follows:
A term that requires active employment when the bonus
is paid, without more, is not sufficient to deprive
an employee terminated without reasonable notice of a
claim for compensation for the bonus he or she would
have received during the notice period, as part of his or
her wrongful dismissal damages.
In Lin, the Ontario Teachers’ Pension Plan Board (OTPPB)
originally had a bonus forfeiture provision that stated:
In the case the Participant resigns or the Participant’s
employment is terminated by Teachers’, the
Participant’s Dollar Grants not yet vested at the time
of termination shall be forfeited forthwith without any
right to compensation.
The Court of Appeal in Lin rejected the assertion that the above
term restricted an employee’s entitlement to compensation for a
lost bonus in the event of a wrongful dismissal, holding as follows:
The wording does not unambiguously alter or
remove the respondent’s common law right to
damages, which include compensation for the bonuses
he would have received while employed and
during the period of reasonable notice. A provision
that no bonus is payable where employment
is terminated by the employer prior to the payout
of the bonus is, in effect, the same as a requirement
of “active employment” at the date of bonus payout.
Without more, such wording is insufficient to deprive
a terminated employee of the bonus he or she
would have earned during the period of reasonable
notice, as a component of damages for wrongful
dismissal.
In Lin, the OTPPB had actually sought to introduce new
bonus plans with revised forfeiture language limiting bonus
entitlement. The new bonus plans provided consideration to
the employees by way of enhanced bonus compensation. The
OTPPB sent letters to affected employees highlighting the specific
forfeiture provisions and asking them to sign off on the
changes. The majority of the employees rejected the changes.
Despite this, the OTPPB proceeded to introduce the new bonus
plans with the enhanced bonus compensation. The Court of
Appeal found that because the employees rejected the forfeiture
provisions, those specific provisions did not take effect despite
the enhanced compensation received.
In contrast to these two decisions, the case of Kielb v. National
Money Mart Company allowed for the enforcement of a clause that
By Hendrik Nieuwland
ScandinavianStock/Shutterstock.com
HRPATODAY.CA ❚ NOVEMBER/DECEMBER 2016 ❚ 15