You're Fired: Here's Your Bonus
If an employee is fired for just cause are they entitled to their performance bonus for the months worked in that year? Most employers probably expect that the answer is no. However, in Master Schulz’s recent decision in Grainger v. Pentagon Farm Centre Ltd., 2019 ABQB 445 (“Grainger”), whether or not the employee was terminated for just cause was determined to be irrelevant to the question of whether or not the employee was entitled to payment of a performance bonus.
Mr. Grainger started as the store and sales manager for Pentagon in January 2015. Part of his role was to build the sales of the business and focus on the sales department and demonstrating and selling equipment. His employment agreement included a clause which provided for an annual performance bonus of “2% on increased growth over the first five million dollars in total sales”. Mr. Grainger’s 2015 bonus was calculated over a period of 12 months and 3 weeks, ending February 29, 2016 and amounted to $114,311.37; more than half of his income for the period.
Several performance issues started to arise in November 2015. These issues continued and ultimately Pentagon terminated Mr. Grainger’s employment on October 8, 2016. Mr. Grainger sued for wrongful dismissal and claimed, in part, that he was entitled to his bonus for the 7-month period he worked from March 1, 2016 to October 8, 2016 (a pro-rata share of his 2016 bonus). Mr. Grainger then applied for partial summary judgment for the bonus (the issue of whether or not he was terminated for just cause was not an issue to be determined in the summary judgment application). Pentagon argued that Mr. Grainger was terminated for cause and therefore was not entitled to any bonus or alternatively that he was not entitled to the bonus because he did not work the full calendar year necessary to earn the bonus.
Master Schulz determined that the question of just cause was not relevant to Mr. Grainger’s entitlement to the pro-rata share of the 2016 bonus. At the time of termination, Mr. Grainger had already performed the work for which the employer had agreed to compensate him. Pentagon had already “received the fruit of the employee’s efforts” and could not avoid its obligation to pay the bonus because it allegedly terminated Mr. Grainger for just cause.
On a plain language reading of the performance bonus section in the employment agreement, Master Schulz determined that there was nothing in the clause expressly limiting payment to someone actively employed during the period in which the bonus was calculated or to partial payment of it. The plain language of the clause indicated that the bonus would be calculated on total sales over $5 million dollars in a year; there was nothing that prevented Mr. Grainger from receiving the bonus if he didn’t work a full year.
Importantly, Master Schulz also determined that the bonus was not discretionary based on the fact that:
- Mr. Grainger’s bonus in 2015 was more than his salary over the same period;
- The bonus was calculated according to an express formula in the employment agreement;
- He was hired to build the sales business and the bonus formula was tied to “increased growth” over $5 million in total sales – the parties’ intention was to incentivize the employee to increase total sales; and
- Nothing in the agreement suggested the bonus was discretionary or limited to active employment over 12 months.
Mr. Grainger was awarded payment of the bonus in the amount of $150,988.95, based on the total sales to the date of Mr. Grainger’s termination. He was not entitled to the bonus on sales which were started before his termination but not completed until after his termination. Master Schulz held there was not sufficient evidence to establish the bonus was intended to include uncompleted sales and there was evidence that the bonus for 2015 had been calculated based only on completed sales.
Lessons for Employers
There are a few things employers can take away from this decision:
- Termination for just cause in and of itself will not likely prevent the employee from being entitled to payment of a contractual performance bonus;
- The language in the agreement regarding the bonus needs to be clear if the employer intends that the bonus will only be paid if the employee works the full bonus period and/or is actively employed on the date of the bonus. If Pentagon had included such express language in the employment agreement they likely would have been successful in defending against the summary judgment application; and
- Employers should understand whether they intend for a bonus to be discretionary or non-discretionary and ensure the wording of the contractual provision clearly reflects their intention. In this case, the bonus was based on a specific percentage of sales over $5 million in a year; this leaves no room for the employer to exercise its discretion. Had the bonus been a discretionary bonus, the outcome would most likely have been different.
The lawyers in our Labour + Employment Group are able to assist employers with drafting or amending bonus language to ensure it reflects the intention of the parties and specifies the circumstances required for an employee to be eligible for a bonus.