employmentlawtoday.com
Jan 10, 2019

Double Bonus: Court sides with employer on bonus entitlement, calculation appeals

Downturn in company earnings made calculating bonus based on average of past years inaccurate
By Alex Ognibene

Employers are often vexed by bonus entitlement and calculation issues when weighing termination decisions and defending claims for wrongful dismissal. Bonus disputes are invariably complex and costly, not only because of the considerable liability that often hangs in the balance, but because resolving bonus entitlement issues requires a nuanced analysis of the applicable bonus plans and policies in conjunction with common law and statutory principles. Needless to say, this inquiry is seldom straightforward.

Thankfully, a recent decision of the Ontario Court of Appeal has analyzed a terminated employee’s entitlement to performance and shareholder bonuses in a manner that is broadly favourable to employers. In Evans v. Paradigm Capital Inc., the court held that the employer was not required to calculate the terminated employee’s performance bonus entitlement using a three-year historic average of her performance bonus, as the employee contended. The court also found that the terminated employee had no entitlement to shareholders’ bonus amounts during her reasonable notice period since the governing shareholders’ agreement required her to tender her shares for redemption on the termination of her employment.

The appellant in Evans was constructively dismissed when her employer, Paradigm Capital, revised her position and reduced her responsibility. The trial judge held that the appellant was entitled to 11 months’ pay in lieu of notice and was owed $250,000 before accounting for mitigation income. That gross amount included base salary ($75,000), performance bonus, and a shareholders’ bonus (dividends the trial judge found the appellant was entitled to as an equity stakeholder in the company).

On appeal, the appellant argued that the trial judge erred in calculating her performance bonus entitlement based on her last percentage allotment and the employer’s actual financial results in 2009, rather than a three-year historic average of her performance bonus. The employer maintained that the trial judge’s performance bonus calculation was appropriate and cross-appealed, arguing that the trial judge erred in awarding the appellant damages related to the shareholders’ bonus even though her equity interest in the company had been redeemed following her dismissal in accordance with the company’s shareholders’ agreement.

The Court of Appeal ultimately sided with the employer on both bonus issues. With respect to the performance bonus, the court agreed with the trial judge’s approach to calculating the performance bonus by applying the 0.5-per-cent participation rate that the appellant had been allotted for seven straight quarters prior to termination of her employment, multiplied by the performance bonus pool for 2009, the year of her termination. The court explained that “although it may sometimes be appropriate to calculate damages based on an average of earnings, there is no requirement to do so.” The appellant had argued that because of her constructive dismissal in January 2009, the 2009 pool used to determine her performance bonus was lower than it would have been had she contributed to it throughout that year, and as a result, her performance bonus was lower. The appellant’s position was accordingly that the trial judge should have calculated her performance bonus entitlement on the basis of a historic three-year average. The Court of Appeal, however, observed that there was no evidence as to the appellant’s previous contribution to the pool, rendering her position that the pool would have been bigger had she contributed to it a matter of speculation. The court also reasoned that the appellant’s notice period was during a period of severe economic downturn, implying that it would be unreasonable to assume equivalency between historic performance bonus payments and present and future circumstances relevant to the 2009 entitlement calculation.

With respect to the appellant’s shareholders’ bonus, the Court of Appeal allowed the employer’s cross-appeal and overturned the trial judge’s award compensating the appellant for the value of the shareholders’ bonus throughout her notice period. Pursuant to the terms of the company’s shareholders’ agreement, the appellant was required to tender her shares back to the company for redemption on termination, and did in fact divest herself of her shares at that time. Once this occurred, the appellant no longer owned any shares capable of earning dividends, and thus was no longer entitled to receive the shareholders’ bonus. The Court of Appeal found that, in holding otherwise, the trial judge “failed to give effect to the terms of the shareholders’ agreement” and contravened the principle that the relevant date for valuation of a wrongfully dismissed employee’s shares is “when he or she is dismissed without cause, not when the notice period ends.” The Court of Appeal also explained that the appellant would be unjustly enriched by receiving “both the return of her share capital upon termination of employment and the dividends she would have earned had she retained the shares and her capital remained at risk in the company for the duration of the reasonable notice period.”