Earnings over Notice Period Not Based on Average;

In Evans v Paradigm Capital ( 2016 ONSC 4286) Justice Gans determined that a 44 year old Senior Institutional Salesperson with 4.5 years service was entitled to 11 months notice.

In deciding what level of compensation that the Plaintiff was entitled to for the notice period the Plaintiff argued that it should be based on her three year backward average , which came to $621,000 per annum.

The Defendant argued that it should be based on her rate of pay as of the date of termination, which came to $149,000.

This is what Gans J. said about this issue:

55 In the first place, as the Ontario Court of Appeal observed, there is no hard and fast rule that mandates a trial judge to adopt an averaging absent compelling reasons to the contrary.23 The British Columbia Court of Appeal adopted the following statement from Harris in Wrongful Dismissal, looseleaf (Toronto: Carswell, 1989) at 4-52.9:
Whatever assessment of damages is made, the standard of salary is not to be an average of prior years, but rather should be based on the income of the employee at the date of termination. In Lawson v. Dominion Securities Corp., [1977] 2 A.C.W.S. 259, the Ontario Court of Appeal stated:
The governing principle is that damages for wrongful dismissal are “prima facie the amount that the plaintiff would have earned had the employment continued according to the contract subject to a deduction in respect of any amount accruing from any other employment which the plaintiff, in minimizing his damages, either had obtained or should reasonably have obtained”. McGregor on Damages 13th edition, para. 884 at p. 594. The judgment appealed from erred in measuring damages by the remuneration of the dismissed employee in the year or years prior to his dismissal: Findlay v. Howard (1919), 58 S.C.R. 516.
(See also Cappelli v. Promospec Specialty Advertising Ltd. (1997), 31 C.C.E.L. (2d) 202, 97 C.L.L.C. 210-026, 39 O.T.C. 328, 1997 CarswellOnt 3704 (Ont. Gen. Div.).)
On the other hand, in some cases the plaintiff’s earnings in the last year of employment may not be representative of his or her usual earnings. The court undoubtedly has jurisdiction to look at preceding years in order to determine a “representative income” for the plaintiff.24
(Emphasis added)
56 Assuming without deciding at this moment in time, whether such a method would permit me to include an amount in respect of the Shareholders’ Bonus, which is very much in issue, I am not persuaded that the use of an averaging of Total Remuneration is appropriate in the circumstances of this case. In my view, the income averaging method is more appropriate in circumstances where the size of the income pool is uncertain; when the dismissed employee is, for example, a commissioned salesperson; or when there is marked volatility in the employee’s remuneration as a result of his or her own efforts over the preceding years leading to termination.
57 In the instant case, the math is fairly straightforward — it is simply a matter of multiplying the ‘last percentage allotment’ established by the Compensation Committee against the Performance Bonus and Shareholders’ Bonus ‘pots’, both of which latter numbers are derived from the charts and appendices that were filed on consent as part of the JBDs. The computation is not dependent on what success — or otherwise — Evans might have enjoyed or suffered in the period of reasonable notice. The trickier issue is determining the appropriate percentage allotment for inclusion in the calculation.
58 While the Performance Bonus could be said to be subject to an upward adjustment had the Compensation Committee determined in any quarter that such were warranted, having regard to the fact that Evans’ client base was dramatically altered for 2009, I am at a loss to see how she might have improved upon her relative ratings during the notice period after this alteration. She had been allotted a 0.5% participation rate for seven straight quarters prior to the moment of termination as a result of point allocation generated from a reasonably static client roster. This track record, as it were, undercuts the notion that she was perhaps on an up-tick. It would not, therefore, be unreasonable to fix her Performance Bonus percentage at the number with which she ended in 2008, being 0.5%. As a corollary, I would not reduce the percentage because her relative performance might very well have declined in light of the loss of clients. In my view, Paradigm can’t have it both ways.
59 Finally, I find the decision of my colleague Wilton-Siegel J. in Chann, supra, in circumstances not too dissimilar to the instant case, to be most instructive:
First, the plaintiff suggested that a three year average of bonus payments should be used as the base rather than the level of the bonus payment in fiscal 2001. This approach may be appropriate in circumstances where bonuses fluctuate only moderately. However, it is not appropriate for the investment banking business in which significant fluctuations occur from year to year. In this industry, bonuses are adjusted yearly for all employees to address results within the most recent fiscal year and performance in prior years is discounted quickly. I see no basis for departing from this approach in the case of the plaintiff. The plaintiff also suggested his 2001 bonus was already reduced to a certain extent as a result of the defendant’s determination in that year that his origination activities were unsatisfactory. I do not see a reason, however, to use a three year average to reduce the effect of that determination which was made while the plaintiff was employed and was, therefore, not included in the plaintiff’s claim.25
60 In the result, I would hold that the plaintiff should recover the sum of $68,750 for the fixed portion of the salary for the 11-month period of notice, and $86,771.21 for her share of the Performance Bonus for the same period.26

This is often a fundamental issue in cases where the compensation is varied and complicated. This case reminds us that using a backward average is only appropriate where it is unfeasible to determine what would have happened if the Plaintiff had been given the chance to work out the notice period. Creative counsel can often put together a compelling case showing what would have actually occurred over the notice period. This can sometimes benefit the plaintiff or , as in this case, benefit the employer.

This is especially important where an employee’s compensation comes from a definable source, like a list of ongoing long term clients for whom responsibility has been transferred to another employee after dismissal. By simply tracking what sales were actually made to those same clients over the notice period, you can have a pretty good picture of what would have happened if the Plaintiff had been allowed to work out her notice period.

Handbook Containing Termination Clause not Binding:

In Cheong v Grand Pacific  Travel &Trade, ( 2016 BCSC 1321) Justice Warren held that a Employee Handbook containing a ESA only termination provision was unenforceable for the following reasons:

1) The handbook came into existance after the Plaintiff was hired and no consideration was provided for her giving up her common law right to reasonable notice upon termination.

2) The handbook did not state that it intended to be a contractual agreement.

3) As the handbook provided that the Employer could unilaterally ” repeal, amend , modify add to or delete from the handbook at any time” the Court found that this is inconsistent with a contract as ” It almost goes without saying that a contract cannot be unilaterally varied “.

4) Many of the provisions refer to theft that the Company” may” provide this or that but is not required to do so. The Court commented that ” Such discretionary language is not reflective of a contract document but, rather, a document intended for informational purposes only”.

5) There was no manifest acceptance by the employee, i.e. her signature acknowledging that she was bound by the terms of the handbook. Nor did her silence constitute acceptance.

I find  the third reason the most interesting as almost every employee handbook I have ever read contains such a boilerplate clause. Moreover some handbooks, especially US based ones, contain an express clause stating that” nothing in this handbook is intended to create a contractual relationship”. This is often mixed in with a clause reinterating the American “at will” concept.

It is now open to counsel to argue that these seemingly boilerplate clauses have the effect of making the booklet unenforceable at least in regards to the enforceability of the termination clause.

There is simply no substitute for  clearly setting out in the employment agreement at the time of hiring the termination provisions that the parties agree on. Why employers continue to try to limit their termination obligations in anything other than the proper way always amazes me.


OCA Again Upholds Bonus over Notice Period

In Lin v Ontario Teachers’ Pension Plan Board ( 2016 ONCA 619)  the Court was faced with the following language in two bonus plans :

87] Again, the relevant language in the 2009 AIP is as follows:

In the case where a Participant resigns or the Participant’s employment is terminated by [Teachers’] prior to the payout of a bonus (normally the first pay period in April), no bonus shall be earned or payable to the Participant.

[88] The language in the 2008 LTIP is similar. It provides that:

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 found that this language was not sufficient  to take away the Plaintiffs’ common law right to his full compensation over the notice period. The Court said it this way :

[89] I reject the appellant’s assertion that these terms restrict Lin’s entitlement to compensation for lost bonuses in the event of wrongful dismissal. 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: Bernier v. Nygard International Partnership, 2013 ONCA 780, 14 C.C.E.L. (4th) 155, affirming 2013 ONSC 4578, 9 C.C.E.L. (4th) 41; Paquette, at para. 31.

[90] And, as Goudge J.A. explained in Veer v. Dover Corporation (Canada) Limited (1999), 45 C.C.E.L. (2d) 183 (Ont. C.A.), at para. 14:

[T]he termination contemplated must, I think, mean termination according to law. Absent express language providing for it, I cannot conclude that the parties intended that an unlawful termination would trigger the end of the employee’s option rights. The agreement should not be presumed to have provided for unlawful triggering events. Rather, the parties must be taken to have intended that the triggering actions would comply with the law in the absence of clear language to the contrary.

Again what does an employer need to do so as to deprive a terminated employee of his bonus over the notice period ?

This is the language that the Teachers tried to rely upon but failed because having asked for the employees’ consent these changes they backed down when the senior managers refused to agree to these changes.

In the event that a Participant resigns his or her employment with [Teachers’] or the Participant’s employment with [Teachers’] is terminated for any reason (whether with or without Cause), the Participant shall on the Termination Date forfeit any and all rights to be paid a bonus under the Plan (or any amount in lieu thereof) or to accrue any further bonus under the Plan. For further certainty, in the event a Participant’s employment terminates after completion of a calendar year in respect of which a bonus had been earned by the Participant under the Plan but prior to payment of that bonus, no bonus (or any amount in lieu thereof) shall be paid to the Participant.

“Termination Date” was defined as:

The date on which a Participant ceases to be employed by or provide services to [Teachers’] and, for greater certainty, does not include any period following the date on which a Participant is notified that his or her employment or services are terminated (whether such termination is lawful or unlawful) during which the Participant is eligible to receive any statutory, contractual or common law notice or compensation in lieu thereof or severance payments unless the Participant is actually required by [Teachers’] to provide services during such notice period.

Would that clause have ben enforceable? Could the Plaintiff apply for relief from forfeiture ?

The real issue is why do employers work so hard at first devising bonus plans that inspire employees to succeed and then work even harder to deprive those same employees of bonuses which in many cases they have already earned?

I strongly suspect that if employers devised plans that were fairer to terminated employees ( for instance providing for pro rata bonuses) , the Courts would be much more willing to uphold the contractual provisions, even if they did not provide for the  full common law entitlements that the employee would normally be entitled to.

I understand why you would not want to pay a bonus to an employee who has quit or was fired for just cause, but why the same treatment for an employee that you decide no longer fits your plans? Why should that employee be deprived of the bonus that he would have earned if he had been terminated legally, i.e. by providing reasonable working notice.

I thought that there was a general legal principle that a person should not benefit from their own illegal or wrongful conduct.

Why not apply that overriding tenet of justice rather that adhering to the out dated concept that an employment contract is simply a commercial contract between sophisticated parties of equal bargaining strength?


Active Employment Clause Fails to Avoid Bonus over the Notice Period.

In Pacquette v TeraGo Networks ( 2016 ONCA 618 ) the Ontario Court of Appeal reviewed a decision in which Perell J. had denied the Plaintiff his bonus over the 17 month notice period because there was a provision in the bonus plan which required the employee to be ” actively employed” at the time of payout in order to receive his bonus.

The Court held that there was a two step process in calculating damages in a wrongful dismissal action:

First, because it was found that the bonus was an intergral part of the Plaintiff’s compensation plan, his damages are to be calculated on the basis of what they would have been had he been permitted to work out his notice period.

Secondly, the Court is to then look at the language of the relevant plan to see if there is anything which would disentitle the Plaintiff to the bonus over the notice period

To quote the judgement:

30] The first step is to consider the appellant’s common law rights. In circumstances where, as here, there was a finding that the bonus was an integral part of the terminated employee’s compensation, Paquette would have been eligible to receive a bonus in February of 2015 and 2016, had he continued to be employed during the 17 month notice period.

[31] The second step is to determine whether there is something in the bonus plan that would specifically remove the appellant’s common law entitlement. The question is not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the appellant’s common law rights: Taggart, at paras. 12, 19-22.

The Court went on to find that the term “active employment” did not have the effect of limiting the bonus entitlement over the notice period.

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.

How then can an employer effectively deprive an employee of their bonus over the notice period? What language will be sufficient?

The Court had this to say about Kieran v. Ingram Micro Inc. (2004), 33 C.C.E.L. (3d) 157 (Ont. C.A.),

[38] Kieran is a stock option case. The issue was whether Mr. Kieran’s time for exercising stock options upon the termination of his employment was extended by the common law notice period where he had been dismissed without cause. The stock option plans provided that he had 60 days from the termination of his employment for any reason other than death, disability or retirement to exercise any rights then vested. “Termination of employment” was defined as the date the employee “ceases to perform services for” the employer “without regard to whether the employee continues thereafter to receive any compensatory payments therefrom or is paid salary thereby in lieu of notice of termination.”

[39] Lang J.A. explained, at para. 56, that under Ontario law, “Mr. Kieran would be entitled to damages for the loss of the plans, as they formed part of his compensation, absent contractual terms to the contrary. In the presence of contractual terms, those terms govern”. She then concluded that the plans were unambiguous as they “specifically provided that Mr. Kieran’s employment terminated on the date he ceased to perform services, without regard to whether he continued to receive compensatory payments or salary in lieu of notice.” Accordingly, Mr. Kieran’s right to exercise the stock options was not extended by the period of reasonable notice. He was not entitled to damages for the stock options.

Therefore this case, although interesting on its facts, simply stands for the proposition that the words ” actively employed ” are ineffective in denying a plaintiff a payment that would have occurred over the notice period, however smart employers will probably be changing their plans immediately to include Kierans’ type language rather than the active employment clause.