Some employment contracts have a clause that says the employee must be ‘actively employed” on the bonus payout date to get his bonus. Sometimes, an employee with this clause in their contract is terminated before the annual bonus payout date and the employer refuses to pay the employee his annual bonus because he wasn’t “actively employed” on the payout date. Thus, the question becomes, is the employee entitled to the bonus or not?
When an employee is terminated, he is often provided either pay in lieu of notice or working notice. The courts have determined that pay in lieu of notice has the same meaning as working notice based on the principle that wrongful dismissal damages (i.e. lost pay) in the notice period should place the plaintiff in the same financial position he would have been at the end of the notice period had he actually been given proper working notice of pending termination, and, thus, the employee is entitled to the salary, benefits, and bonuses he would have received during the notice period in case of payment in lieu of notice. Accordingly, in the case of an employee terminated by payment in lieu of working notice, a contractual provision that no bonus is payable unless the employee is ‘actively employed’ at the date of bonus payout is insufficient to deprive him of the bonus he would have earned during the notice period because he was in a sense ‘actively employed’ in that he was paid in lieu of having to come in and work the notice period. After all, if the employee had been provided working notice, he would have been “actively employeed”.
What I wrote above may be confusing, but look at this way: When employment law first started hundreds of years ago, nobody ever got pay in lieu of notice. The “common law” started out such that employers were required to give advance warning of termination. This meant the employer had to give notice to the employee weeks or months in advance that they would lose their job. In turn, the employee had to work “the notice period”. Hundreds of years later, employers began to just pay the employees what they would have earned had they given appropriate working notice. Accordingly, the old theory still stands that an employer must give notice, however, employers can now just pay that amount and tell the employee to stay away instead of requiring employees actually work the notice period. But, the law recognizes that the employer has to pay every cent for pay, benefits and bonus etc. that the employee would have earned working the notice period like the same laws did hundreds of years ago. What this all means is that if a contract says someone must be ‘actively employed’ on the payout date, that’s basically just the contract restating the law: if you would have worked on the bonus payout date had we provided you working notice, then you get the bonus. The ‘active employment’ clause doesn’t actually do anything. It has no meaning.
In Taggart v. Canadian Life Assurance Co., 2005 CanLII 3220, Judge Campbell explained the correct approach in relation to the requirement for active employment as a prerequisite for the accrual of a bonus at paragraph 16:
Assuming that the [bonus plan] can be read as requiring active service as a prerequisite for the accrual of [bonus], I find unpersuasive the argument that this precludes damages as compensation for the lost [bonus]. This argument, it seems to me, ignores the legal nature of the respondent’s claim. The claim is not … for the [bonus] themselves. Rather, it is for common law … damages as compensation for the [bonus] the [employee] would have earned had the [employer] not [failed to provide reasonable notice]. The [employee] had the right to work and to be paid his salary and receive [his bonus] throughout the entire … notice period.
The only caveat is that an employee faced with an “active employment” clause in their contract must prove that the notice period extended to the bonus payout date. Consider this – if someone is terminated with four months notice, but the bonus payout date is in six months, the employee will have to prove that the notice period should have been six months or longer such that the notice period lands on the bonus payout date. Click here to learn how lawyers calculate notice.
Contact me at my office if you are an executive or a company and need assistance with the issue of an “active employment” clause in a contract.
Jeff is an employment lawyer in Toronto. He is the Principal of the Dutton Employment Law Group at Monkhouse Law. Jeff is a frequent lecturer on employment law and is the author of an employment law textbook and various trade journal articles.