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Have your bonus preconditions been “sufficiently” communicated to your employees?

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In the last few months, there has been an influx of commentary on the enforceability of contractual provisions purporting to limit an employee’s bonus entitlements upon termination.  Following the Ontario Court of Appeal’s seminal decisions in Paquette v. TeraGo Networks Inc., 2016 ONCA 618 (“Paquette”) and Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619 (“Lin”), much of this commentary has focussed on the language needed to oust an employee’s implied right to their complete compensation package during the reasonable notice period.  This focus on semantics has overshadowed one other consideration that remains instrumental to the enforceability of bonus provisions – the need to sufficiently communicate to employees the preconditions of bonus eligibility.

The Ontario Divisional Court’s recent decision in Larkey v State Street Bank and Trust Company, 2016 ONSC 7683 highlights the consequences of an employer’s inadequate efforts to communicate the terms of a bonus plan.  Michael Larkey was employed by State Street Bank and Trust Company (“State Street”) for approximately 15 years, until his resignation in January 2015.  Throughout his employment, Mr. Larkey earned an annual bonus that was generally paid shortly following the year in which it was earned.

State Street’s bonus policy provided that employees needed to be “actively employed” at the time of bonus payout in order to be eligible for the annual incentive award.  The bonus policy came into effect in August 2006, and was posted on State Street’s intranet network.  In addition, Mr. Larkey received annual compensation statements and e-mails in 2006 with notifications of State Street’s revised policies.

Following his resignation, State Street referred to the language of the bonus policy and declined to pay Mr. Larkey the bonus that he otherwise earned in 2015.  Accordingly, Mr. Larkey commenced an action to recover his bonus.

In concluding that Mr. Larkey was entitled to the bonus, the trial judge relied on the Ontario Court of Appeal’s decision in Poole v. Whirlpool Corporation, 2011 ONCA 808, which held that a bonus eligibility precondition either has to be specifically agreed to by an employee, or drawn to the employee’s attention:

The bonus eligibility precondition…was not incorporated in the respondent’s 2007 letter of employment; nor was there any evidence that the precondition was otherwise drawn to the respondent’s attention at any time, whether orally, in writing, or by means of the appellant’s internal intranet communication system, or that he ever agreed to it… The appellant’s failure to… establish… that they had communicated the bonus eligibility precondition to the respondent or obtained his assent or agreement to it precludes any reliance by the appellants on the precondition to defeat the respondent’s bonus claim.

The trial judge specifically found that: (i) Mr. Larkey never expressly agreed to the policy; (ii) State Street did not “sufficiently communicate” the preconditions; and (iii) while there was some notice, several forms of “insufficient communication” did not amount to “reasonable communication”.

The Divisional Court dismissed State Street’s appeal on the issue.  Interestingly, although the decisions in Paquette and Lin would likely have rendered the “actively employed” requirement unenforceable in any event, there was no legal analysis on the language of the bonus policy.  Instead, the Divisional Court focussed on the issue of communication, and held that the trial judge was entitled to conclude that State Street’s communication efforts were insufficient.

Although the reasons of the Divisional Court are somewhat limited, they nevertheless provide valuable guidance to employers seeking to enforce restrictive bonus provisions:

  1. Semantics are not everything – The enforceability of bonus preconditions does not depend only on the terms of a bonus plan. In addition to drafting enforceable contractual language (that accounts for the decisions in Paquette and Lin), employers must consider whether they have sufficiently communicated any pertinent preconditions.
  2. Obtain the employee’s signed acknowledgement and consent – Merely posting policies in conspicuous places (e.g. an internal computer network), or sending vague e-mails with attachments, may be insufficient to satisfy the communication requirement. In contrast, employers should require their employees to sign acknowledgements and expressly consent to any restrictive bonus provisions.
  3. Insert bonus preconditions in the employment agreement – Further to the above, employers will have a much stronger evidentiary basis to support the enforceability of bonus provisions where any restrictions are inserted directly into signed employment agreements.
  4. Draw the employee’s attention to the restrictive language – Employers should strive to expressly draw the employee’s attention to the pertinent restrictive provisions. Courts are unlikely to be sympathetic to employers who hide restrictive language in 200-page documents.

Titus Totan

About the Author: Toronto employment lawyer Titus Totan supports both employee and employer clients in all areas of employment law, including employment standards, contractual and implied obligations, terminations, workplace investigations and workplace human rights.