Bonus and Incentive Entitlement on Termination — The Paquette Revolution

The Old Playbook: "Active Employment Required"

For decades, Canadian employers operated under a comfortable assumption: if your bonus plan says you need to be "actively employed" on the payout date to receive your bonus, then terminated employees get nothing. Clean. Simple. Cheap.

Bonus plans, incentive compensation agreements, and stock option vesting schedules almost universally contain some variant of this language. "The employee must be actively employed on the date of payment." "Employees who have been terminated for any reason prior to the payout date forfeit all entitlement." "Participation in the incentive plan ceases on the date of termination."

Employers treated these clauses as bulletproof. If you fired someone in October and the bonus was paid in March, the terminated employee got nothing — regardless of how much revenue they'd generated, how much they'd contributed to team targets, or how large their bonus would have been.

Then came Paquette.

Paquette v. TeraGo Networks: The Decision

In Paquette v. TeraGo Networks Inc., 2016 ONCA 618, the Ontario Court of Appeal fundamentally rewrote the rules on bonus entitlement during the reasonable notice period. Robert Paquette was a sales executive at TeraGo, a telecommunications company. He was terminated without cause after approximately five years of employment. His compensation included a base salary and a significant incentive bonus.

TeraGo's incentive plan contained a standard "active employment" clause: employees had to be actively employed at the time of payout to receive any bonus. TeraGo argued that since Paquette had been terminated before the payout date, he was not entitled to any incentive compensation during the notice period.

The Court of Appeal disagreed. Justice van Rensburg, writing for the Court, drew a critical distinction between two types of bonus plans:

- **Integral bonus plans:** Plans where the bonus is an integral part of the employee's compensation package — earned through performance, tied to measurable targets, and representing a significant portion of total compensation. These entitlements survive termination and must be paid during the reasonable notice period.

- **Purely discretionary bonuses:** Truly gratuitous payments that the employer has complete discretion to grant or withhold, unconnected to performance metrics or contractual entitlement. Only these can be validly excluded by "active employment" clauses.

The Court held that Paquette's bonus was integral to his compensation. It was earned through meeting sales targets, calculated according to a formula, and represented a substantial portion of his total pay. An "active employment" clause could not deprive him of this compensation during the common law reasonable notice period, because doing so would undermine the very purpose of reasonable notice — to put the employee in the position they would have been in had proper notice been given.

Why "Active Employment" Clauses Fail

The logic of Paquette rests on a foundational principle of wrongful dismissal law: when an employer terminates an employee without providing reasonable notice, the employee is entitled to everything they would have earned during the notice period — salary, benefits, pension contributions, and compensation that forms an integral part of their remuneration. An "active employment" clause that purports to eliminate bonus entitlement during the notice period is, in effect, a termination clause that limits the employer's obligations. And like any termination clause, it must comply with the ESA or risk being struck down entirely.

The Ontario Court of Appeal reinforced this principle in Andros v. Colliers Macaulay Nicolls Inc., 2019 ONCA 679, where the Court confirmed that commissions earned during the reasonable notice period must be paid even when the employment contract contained a clause purporting to cut off entitlement upon termination. The Court applied the Paquette framework, asking whether the commissions were an integral part of the employee's compensation (they were) and whether the contractual language was sufficient to clearly and unambiguously limit common law entitlements (it wasn't).

The Lin v. Ontario Teachers' Pension Plan Refinement

In Lin v. Ontario Teachers' Pension Plan Board, 2016 ONCA 619 — released the same day as Paquette — the Court of Appeal addressed the other side of the coin. David Lin was a portfolio manager at OTPP. His compensation included a discretionary bonus that was not tied to a formula or specific performance metrics. The employer had complete discretion over whether to pay the bonus and how much to award.

The Court held that Lin's bonus was genuinely discretionary — not integral to his compensation in the same way as Paquette's formulaic incentive plan. The "active employment" clause was therefore enforceable, and Lin was not entitled to bonus compensation during the notice period.

Read together, Paquette and Lin establish a spectrum. On one end: formulaic, performance-based incentive compensation that is integral to the employment bargain — these survive termination. On the other: truly discretionary, gratuitous bonuses where the employer retains complete control — these can be validly excluded. The challenge is that most bonus plans fall somewhere in between.

How Courts Analyze the Spectrum

Post-Paquette, courts have developed a multi-factor analysis for determining where a particular bonus plan falls on the integral-to-discretionary spectrum:

1. **Is there a formula?** If the bonus is calculated by reference to specific targets, metrics, or percentages, it's more likely to be integral. If the amount is entirely at the employer's discretion with no formula, it leans discretionary.

2. **What percentage of total compensation does the bonus represent?** A bonus that constitutes 30-50% or more of total compensation is clearly integral to the employment bargain. A small year-end gift is not.

3. **Was the bonus historically paid?** A bonus that has been paid consistently, year after year, in similar amounts, starts to look like an integral part of compensation regardless of how the plan characterizes it.

4. **How does the plan language describe the bonus?** Courts look past labels. A "discretionary bonus" that is calculated according to a formula, based on achieved targets, and consistently paid at predictable levels is not truly discretionary — no matter what the plan document says.

5. **Does the plan language clearly and unambiguously limit common law entitlements?** Following *Waksdale*, any termination-related provision — including bonus forfeiture clauses — must be clearly drafted and must not contravene the ESA.

Calculating Bonus During the Notice Period

When courts find that a terminated employee is entitled to bonus compensation during the reasonable notice period, the calculation depends on the plan's structure:

- **Formulaic plans:** Courts apply the formula to the notice period, using historical performance, pro-rated targets, or the employee's performance trajectory to estimate what the bonus would have been.

- **Target-based plans:** If the employee achieved targets before termination, the bonus for the portion of the bonus period worked may be straightforward. For the remaining notice period, courts may prorate based on historical averages.

- **Hybrid plans:** For plans with both formulaic and discretionary elements, courts isolate the formulaic components and assess the discretionary component based on the employer's historical exercise of discretion.

In Sifton v. 1149078 Ontario Inc. (o/a D.V. Sadler Insurance Brokers & Consultants), 2023 ONSC 704, the court calculated bonus entitlement during the notice period by reference to the employee's historical bonus payments, averaging the amounts over several years to arrive at a fair estimate of what would have been earned.

Stock Options and RSUs: The New Frontier

The Paquette framework extends beyond cash bonuses to equity compensation. Restricted stock units (RSUs), stock options, and deferred share unit plans are increasingly common in tech and financial services, and they all raise the same question: does the employee's entitlement survive termination?

In Liggett v. Veeva Systems Inc., 2025 ONSC (recently reported in early 2026), the Ontario court invalidated RSU termination clauses using the same ESA-compliance analysis applied to cash termination provisions. If the equity plan's termination language contravenes the ESA — for example, by purporting to deny vesting that would otherwise occur during the statutory notice period — the clause fails, and the employee is entitled to the equity that would have vested during the common law notice period.

This is an enormous financial issue. For tech employees, equity compensation can represent 30-50% or more of total compensation. A senior engineer at a publicly traded company earning $200,000 in base salary might have an additional $150,000 in annual RSU vesting. If that engineer is terminated without cause and is entitled to 12 months of reasonable notice, the equity component alone could be worth more than the wrongful dismissal damages on salary.

What Terminated Employees Should Do

1. **Identify every component of your compensation.** Base salary is obvious. But also list your bonus, incentive plan, stock options, RSUs, commission structure, profit-sharing, car allowance, RRSP matching, and any other benefits. All of these potentially survive termination and form part of your damages.

2. **Read the plan documents carefully.** Look for "active employment" requirements, forfeiture-on-termination provisions, and definitions of "cause." Post-*Paquette*, many of these clauses are unenforceable, but the analysis depends on the specific language.

3. **Pull your bonus history.** Courts rely on historical bonus payments to calculate entitlement during the notice period. If your bonus has been consistent, that consistency is powerful evidence that it was integral to your compensation.

4. **Don't assume forfeiture is valid.** The plan says you lose everything? That may not be the law. *Paquette*, *Andros*, and subsequent cases have made clear that plan language doesn't override common law entitlements unless it meets a high bar of clarity and ESA compliance.

5. **Quantify the full picture.** Your wrongful dismissal claim isn't just lost salary. It's lost salary plus lost bonus plus lost equity plus lost benefits plus lost pension contributions. The total can be two to three times the salary-only figure.

The Bottom Line

Paquette was decided in 2016. It is no longer new law. And yet employers continue to deny bonus entitlements to terminated employees based on "active employment" clauses that courts have repeatedly refused to enforce. If you've been terminated and your employer told you that your bonus is forfeit, don't accept that at face value. The law has moved, and it has moved dramatically in favour of employees. The bonus you were "supposed" to lose may be the largest single component of your wrongful dismissal claim.