Severance packages take a number of factors into account — time at the company, position, availability of similar positions and more — but they often ignore bonuses. Terminations can already be stressful, so for an employer to time a termination to occur shortly before a bonus payout can add insult to injury.
In my experience as an employment lawyer, companies tell employees that if they’re no longer employed, they’re no longer entitled to their bonuses. But that’s not always the case.
Employees should have their bonus entitlements assessed by a lawyer immediately after they lose their job, or they risk leaving significant compensation on the table.
READ MORE: The top 5 termination myths — and what you need to know about being fired from a job
Are you entitled to your bonus if you are terminated?
When an employee is terminated, they are entitled to receive advance notice of their firing, which can be weeks or many months. Employers often provide financial compensation instead, in the form of a severance package. The severance package is based on multiple factors, like age and time spent with the company, and can be as much as 24 months’ pay.
If the notice period or severance offer from the company falls short of what the law says it should be, a wrongful dismissal has taken place, and the employee can pursue additional compensation. The purpose of this compensation is to put the out-of-work individual in the same financial position they would have been in had proper severance been provided.
In other words, an employer is required to make an employee whole for the length of the applicable notice period. If the employee can show that they would have been eligible for a bonus payout if they’d continued working to the end of the notice period, they may be entitled to seek the unpaid bonus, subject to the terms of an employment agreement or bonus plan.
Should my bonus be part of my severance package?
Severance should include all forms of compensation, including base salary, commission, overtime, benefits and bonus pay. If you routinely earn an annual bonus as part of your income, it must be accounted for in your termination package.
I recently spoke with a long-service employee working for a big bank whose annual bonus comprised nearly 50 per cent of his gross salary. When he was fired, the bank offered him a severance package that completely ignored the existence of his significant bonus. I took on his case and ultimately succeeded in enhancing his severance payment to include that bonus.
READ MORE: Return company property, call a lawyer: 5 things to do right away if you’re fired
How do employment contracts affect my bonus?
In some circumstances, carefully drafted employment agreements can limit an employee’s right to bonus pay when they are let go. If the language in the contract is clear and unequivocal, an employer can rightfully exclude bonus payments from termination pay. That is why it is important to understand your employment contract and negotiate changes to key clauses before you sign, or you could end up forgoing your bonus pay if you are laid off.
READ MORE: What you need to know before you sign a contract — even if your employer asks you to
Are bonus clauses in a contract always enforceable?
The employment lawyers at Samfiru Tumarkin LLP regularly meet with clients whose employers insist that they are not entitled to any bonus payout when let go, pointing to specific language in their employment agreement. Contractual clauses that restrict bonus payments upon termination, however, are seldom enforceable.
Employees are usually entitled to accrued bonus payments to the date of termination, as well as the value of the pro-rated bonus earned during the notice period, unless there is very clear exclusionary language.
Employers will often rely on a term in the company’s bonus plan that requires active employment as a condition of payment to argue that they don’t have to pay a bonus to employees who are let go. Court decisions, however, have confirmed that even this language is insufficient to deprive an employee of their bonus entitlements.
Can my employer refuse to pay an annual bonus?
If your employer fails to pay a large annual bonus that forms an integral component of your compensation, it can amount to a constructive dismissal.
Depending on the value of the bonus, the act of withholding it may be seen as a fundamental change to the terms of your employment, and you could be owed full severance. Even if the bonus does not form a substantial component of your compensation, your employer could still be liable for compensation for a breach of the contract.
Bonuses are a complex area of employment law, so it’s important to have both your employment contract and termination letter reviewed by an employment lawyer to find out what you are owed.
Have you been let go from your job? Has your employer refused to pay your bonus entitlements?
Contact the firm or call 1-855-821-5900 to secure assistance from an employment lawyer in Ontario, British Columbia or Alberta. Get the advice you need — and the compensation you deserve.
Fiona Martyn is an employment lawyer at Samfiru Tumarkin LLP, Canada’s most positively reviewed law firm specializing in employment law and long-term disability claims. The firm provides free advice on Canada’s only Employment Law Show on TV and radio.