For Your Consideration – Update Employment Agreements Before End of Year Bonuses

As we near the end of 2022 and bonus season is right around the corner, now is a great time for employers to review and update their employment agreements. In order to make changes to an existing employment agreement, the employer must give the employee “consideration.” Without consideration, the changes would not be enforceable.

Consideration can come in many different forms, but is generally a benefit that the employee would not have received had they not signed the amended employment agreement. Typically, it comes in the form of a one-time payment, an increase in salary or hourly wage rate, or increased benefit entitlements or vacation. A non-discretionary bonus payment that the employee would have earned at the end of the year regardless of whether they signed the revised employment agreement would not be sufficient consideration, but a discretionary bonus can be. If the employer can show that the employee was not guaranteed an end of year bonus, and that the bonus—or a portion of it—was paid in exchange for the employee signing the amended employment agreement, this will likely be sufficient consideration.

With that in mind, we have highlighted some areas that employers may want to shore up in their employment agreements:

1. Termination provisions: This is typically one of the most important clauses in an employment agreement, and one which employers should review and update regularly. In the last couple of years, the majority of termination clauses have been rendered unenforceable by operation of Waksdale v. Swegon North America Inc., 2020 ONCA 391, where the Ontario Court of Appeal determined a termination clause was unenforceable because the “just cause” provision allowed the employer to terminate an employee without notice or pay in lieu for reasons that did not constitute cause under Ontario’s Employment Standards Act, 2000 (“ESA“). We have now seen Waksdale applied in a number of cases, and it is clear that it is here to stay. In Gracias v. Dr. David Walt Dentistry, 2022 ONSC 2967, the Ontario Superior Court reiterated the rule from Waksdale and found that a termination provision will not be saved by a severability clause. In Rahman v. Cannon Design Architecture Inc., 2022 ONCA 451, the Ontario Court of Appeal found that the employee’s sophistication and the parties’ subjective intention to not contravene the ESA an employment agreement was not relevant when assessing the enforceability of the termination provision. The Court of Appeal held that the just cause provision in the employment agreement ran into a Waksdale problem and was therefore unenforceable.
2. Unpaid layoff provisions: This is something we saw a lot of during the COVID-19 pandemic, when employers needed to temporarily lay off employees to match a slow down in work, particularly in manufacturing and service industries. Unless there is a provision in the employment agreement allowing an employer to temporarily lay off an employee without pay, the employee may argue that doing so constitutes a constructive dismissal. While many provinces enacted legislation during the pandemic which technically allowed employers to engage in temporary layoffs, this did not stop employees from bringing claims for constructive dismissal under the common law. Coming out of the pandemic, we recommend to all of our clients that they have language in their employment agreements permitting them to temporarily lay off employees without pay.
3. Long term and short term incentive plans: We are seeing more and more litigation regarding the payout of long and short term incentives. Recent case law[1] has made it clear that unless the language of the incentive plan specifically excludes payout during a notice period, it will be payable. Language requiring an employee to be “actively employed” to qualify for payment will not suffice. Employers with this kind of language in their employment agreements and bonus plans will need to pay out an employee’s incentives during the notice period, including bonus payments, stock option vesting, etc. Combined with an unenforceable termination provision and an employee with an extended length of service, the liability for something like this could be significant. Avoiding this requires updating not only the respective incentive plan document (if any), but also the termination provisions used in employment agreements.

Takeaways for Employers

Making changes to an employment agreement requires consideration and employers can make good use of their discretionary end of year bonuses to do so. Employers should review and revise their employment agreements regularly and have them updated to address changes in the law. Above are some examples of provisions or language that often require changes, but there are certainly others. If you have not had your employment agreements reviewed in the last year, we recommend doing so prior to payout of discretionary bonuses.

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[1] In Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, the Supreme Court of Canada found that an employee was still entitled to a bonus payment under a long term incentive plan (“LTIP”) even though language in the employment agreement precluded any such payment. In Matthews, the employer’s company was sold 13 months after the employee resigned, which constituted a “Realization Event” under the LTIP and triggered bonus payments to qualifying employees. The plaintiff sought damages for constructive dismissal, including the bonus payment, and the employer argued that no bonus payment was owing under the LTIP since the plaintiff was not an employee. In finding for the employee, the Court reiterated that reasonable notice upon termination includes all salary and benefits, including bonuses that an employee would have earned had the employee continued to work through the reasonable notice period. The language of the LTIP did not unambiguously limit or remove the employee’s common law right to damages. Matthews emphasizes the need for employers to review the language of their incentive plans to ensure that they are carefully drafted and comply with the analytical framework provided in the decision.