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Employers Can Contract Out of Post-Termination Bonus Obligations

One of the most hotly contested issues on termination is whether an employee is entitled to a bonus that would have been payable at a later date. Often this arises when an employment contract contemplates a bonus being paid at a particular time of the year, but the employee resigns or is terminated prior to that trigger date. A recent decision exemplifies how specific contract language can protect employers from paying future bonuses to terminated employees.

In Jivraj v Strategic Maintenance Ltd, 2014 ABQB 463, the Alberta Queens Bench held that the employment contract did not entitle the employee to any further bonus payments once the employment relationship ended.

The decision regarding the bonus formed part of a wrongful dismissal suit where Mr. Jivraj was terminated after 17 months of employment. During his employment he held an executive position as the General Manager and answered directly to the CEO of the Strategic group of companies. At the time of termination the employee was 50 years old. The appropriate notice period was determined using the oft-cited Bardal factors of age, length of service, character of the employment, and availability of alternative employment. The court viewed his age as a neutral factor, and found his short tenure should not significantly reduce the notice period. Mr. Jivraj was well qualified for other positions but, on the other hand, had legitimate expectations of similar remuneration in other employment. In this instance the court found 6 months was an appropriate notice period.

The decision with respect to bonus entitlement turned on the language of two separate employment contracts. The first employment contract was signed at the commencement of the employment relationship in October 2010. The contract contemplated a bonus and stated the following (found at paragraph 7 of the decision):

Upon commencement of his employment with SML, Mr. Jivraj’s compensation included:

1.      Annual base salary of $160,000;

2.      Bonuses of up to 50% of annual salary payable in three installments, being:

(a)   1/3 at the time the decision is made to award the bonus (“bonus award date”);

(b)   1/3 on the first anniversary of the bonus award date; and

(c)   1/3 on the second anniversary of the bonus award date.

Prior to trial the parties submitted an agreed statement of facts that commented on the 2^nd and 3^rd bonus installments. It was understood that these payments would not be made unless Mr. Jivraj remained a full-time employee when those installments became payable. After approximately one year the parties evaluated Mr. Jivraj’s performance and entered a second agreement.

The second agreement increased the plaintiff’s base salary, awarded him an $80,000 bonus to be paid in three installments (i.e. November 15, 2011, 2012, and 2013), and set up a new bonus structure to be reviewed annually and remain at the discretion of the employer.

The plaintiff was terminated without cause in April 2012 and was not paid the 2^nd and 3^rd installments, nor reviewed for any future bonus opportunities under the new structure. The court agreed with the employer’s decision not to pay any future bonuses. It was noted that this arrangement may seem unfair, but case law has made it clear that parties may agree to forfeit accrued employment benefits through clear and unambiguous language. The language noted in Clause 8 of the second agreement fit those criteria.

Clause 8 of the second agreement stated “The Employee understands and agrees that all Bonus payments are conditional upon the Employee remaining in the employment of Strategic at the time any portion of a Bonus is actually payable to the Employee…and if…the Employee ceases[d] employment with Strategic, regardless of the circumstances, then no further Bonus amounts are payable to the Employee.” Mr. Jivraj initialed this statement indicating his understanding. The phrase “regardless of the circumstances” was especially in critical in denying the employee’s right to any bonus entitlement.

On the issue of the future bonus structure the court, again, denied access to such damages. In doing so the following points were highlighted by Justice Jones:

1. The new agreement required a bonus review by October 30, 2012 but the common law notice period ended on September 9, 2012
2. Any potential bonus was available at the discretion of Strategic Maintenance Ltd.
3. Mr. Jivraj had not been employed long enough to assert any reasonable expectation that a bonus would be awarded     

While this case is not technically binding on Ontario courts, it is still good news for employers who wish to limit their potential damages after the employment relationship breaks down. Damages for future bonuses can be extensive, especially when terminating senior executives or long service employees. The lawyers at CCPartners can help prevent liability through expert drafting of employment contracts.