A practical guide for Ontario employees whose employer withheld a bonus after termination — and what the law actually says
“You Weren’t Employed on the Payment Date”
You worked hard all year. Then, weeks or even days before the annual bonus payout, your employer terminated your employment. Now they are telling you that because you were not “actively employed” on the bonus payment date, you are not entitled to anything.
This is one of the most common—and most contested—disputes in Ontario employment law. Employers frequently assume that labelling a bonus “discretionary” gives them a free pass to withhold it on termination. Ontario courts have repeatedly and emphatically rejected that assumption.
At Z Legal P.C., our Toronto employment lawyers regularly help employees recover bonuses that were wrongfully withheld after termination. This article explains when a discretionary bonus must be paid after termination, when it need not be, and what the courts look at to draw that line.
The Core Legal Problem: “Discretionary” Does Not Mean “Optional on Termination”
The word “discretionary” in a bonus plan is not a get-out-of-jail-free card for employers. Ontario courts have drawn a crucial distinction between two different types of discretion:
- Discretion as to how much bonus to pay (quantum discretion); and
- Discretion as to whether to pay any bonus at all (liability discretion).
Even where an employer has genuine discretion over the size of a bonus, that discretion must be exercised honestly, in good faith, and not arbitrarily or capriciously. More importantly, that discretion does not automatically extend to stripping a terminated employee of a bonus that was accruing throughout the notice period.
The foundational principle was articulated by the Supreme Court of Canada in Matthews v. Ocean Nutrition Canada Ltd., [2020] 3 SCR 260—one of the most important employment law decisions in a generation. The Court held that during the period of reasonable notice, the employee is entitled to all compensation they would have earned had they continued working. Bonus entitlements that would have accrued or been paid during the notice period are presumptively included in damages, unless the employment contract clearly and unambiguously removes that right.
| ⚖️ The Matthews Principle: An employee is entitled to be put in the position they would have been in had they received proper notice of termination. If a bonus would have been paid during the notice period, the terminated employee is entitled to that bonus as part of their damages — regardless of how the plan is labelled. |
The Matthews Framework: Two Questions Courts Ask
The Supreme Court in Matthews established a two-part analytical framework that Ontario courts now apply consistently. Employment lawyers in Toronto and across Ontario use this framework to evaluate every bonus dispute on termination.
Question 1: Would the Employee Have Been Entitled to the Bonus But for the Termination?
Courts first ask whether, had the employee continued to work through the reasonable notice period, the bonus would have been payable. This requires examining the terms of the bonus plan, the performance period, and the payment date relative to the notice period. Key considerations include:
- Did the employee perform the work during the bonus performance period (e.g., the fiscal year)?
- Does the payment date fall within the reasonable notice period?
- Was the employee on track to meet any performance conditions attached to the bonus?
- Was the bonus an integral, expected part of the employee’s total compensation—or a rare, unexpected windfall?
Question 2: Does the Contract Clearly and Unambiguously Remove the Entitlement?
Even where the answer to Question 1 is yes, the employer may still escape liability if the bonus plan contains language that clearly and unambiguously disentitles terminated employees. However, courts apply this exception narrowly and strictly. Boilerplate “discretionary” language is almost never sufficient. Courts require the contract to expressly address the termination scenario.
The following types of clauses have been found insufficient to oust a terminated employee’s bonus entitlement:
- “The bonus is entirely at the discretion of the company.”
- “Payment of the bonus requires the employee to be actively employed on the payment date.”
- “The company reserves the right to modify or cancel the bonus plan at any time.”
Courts have held that even relatively explicit clauses may fail if they are inconsistent with the overall compensation structure, were not drawn to the employee’s attention, or if the employer’s own conduct contradicts the restrictive interpretation.
| ⚠️ For Employers: A clause stating the bonus is ‘discretionary’ or that employment must be ‘active’ on the payment date will not, on its own, extinguish a terminated employee’s bonus claim. The clause must be clear, unambiguous, and specifically address the termination scenario. Courts will construe ambiguity against the employer. |
When a Discretionary Bonus WILL Be Paid After Termination
Based on Matthews and the growing body of Ontario case law that follows it, terminated employees are most likely to succeed in recovering a bonus in the following circumstances:
1. The Bonus Was an Integral Part of Compensation
Where bonuses were paid regularly, year after year, and formed a significant portion of the employee’s total compensation package, courts treat them as part of the reasonable expectation of continued employment. The more integral the bonus, the harder it is for an employer to withhold it on termination without clear contractual authority.
- Annual bonuses consistently paid for five or more consecutive years are strong indicators of an integral component;
- Bonuses that appear in the employee’s offer letter, total compensation summaries, or T4s as expected compensation carry significant weight;
- Bonuses that were taken into account in setting the base salary (i.e., a lower base with a meaningful bonus component) are treated as part of the overall wage bargain.
2. The Performance Period Was Substantially Completed Before Termination
If the employee worked through substantially all of the bonus performance period (e.g., 11 months of a 12-month fiscal year) before being terminated, courts are reluctant to allow employers to capture all of that value without compensation. Even if the payment date is after termination, a prorated or full bonus may be awarded.
3. The Payment Date Falls Within the Reasonable Notice Period
Under the Matthews framework, the employee is entitled to compensation that would have been earned during the notice period. If the bonus payment date falls within what a court determines to be a reasonable notice period (which for senior, long-tenured employees in Toronto may be 18–24 months or more), the bonus should be included in the damages calculation.
4. The Bonus Plan Language Is Ambiguous or Silent on Termination
Courts apply the principle that ambiguous contractual language is construed against the party who drafted it (contra proferentem). If the bonus plan does not specifically and unambiguously address what happens on termination, courts will default to the employee’s reasonable expectation—which, for a regular bonus recipient, is that they will receive what they earned.
5. The Employer Exercised Discretion in Bad Faith
Even where an employer has genuine discretion over the amount of a bonus, it must exercise that discretion in good faith. If there is evidence that the employer manipulated the performance assessment, arbitrarily assigned a zero rating, or used discretion as a pretext to punish the employee for asserting their rights, courts will intervene. Employers cannot exercise discretion capriciously or in a manner inconsistent with the reasonable expectations established by the parties’ course of dealing.
When a Discretionary Bonus Will NOT Be Paid After Termination
Employers can successfully defeat a bonus claim on termination in the following circumstances. These cases are the exception rather than the rule, but they illustrate what is required.
1. The Contract Clearly and Specifically Excludes Terminated Employees
A bonus plan that contains language specifically addressing the termination scenario—and clearly stating that no bonus accrues or is payable if employment ends before the payment date for any reason, including termination by the employer—has a significantly better chance of being upheld. The key word is specificity: vague or boilerplate discretion language will not suffice.
2. The Bonus Was Genuinely Unprecedented or Non-Recurring
A one-time special bonus that the employer has never paid before and that was expressly described as exceptional is easier to characterize as a true discretionary payment that did not form part of the employee’s regular compensation. However, even here, if the employee performed the work that generated the bonus, courts may find an entitlement.
3. The Performance Period Had Not Yet Begun or Had Just Started
If termination occurs at the very beginning of a new fiscal year or performance period, before the employee has contributed meaningfully to the performance outcomes that generate the bonus, a claim for that period’s bonus is weaker. Courts are less willing to award a bonus for work the employee never had an opportunity to perform.
4. The Bonus Is Tied to Objective Conditions the Employee Did Not Meet
Some bonus plans are tied to objective conditions that are entirely outside the employee’s control—for example, a company-wide profitability threshold that was not met in the performance year. If the employer can establish that the condition was not met (and was not going to be met) for reasons unrelated to the termination, the bonus claim may fail.
Here is a quick comparison of the key factors:
| Bonus Likely Payable After Termination | Bonus Less Likely Payable After Termination |
|---|---|
| Bonus paid consistently, year over year | Bonus was a one-time or rare occurrence |
| Bonus is a significant % of total pay | Bonus was a small, incidental top-up |
| Performance period mostly or fully completed | Performance period had just started |
| Payment date falls within notice period | Payment date is far outside notice period |
| Plan language is vague or silent on termination | Plan clearly and specifically excludes terminated employees |
| Employer exercised discretion arbitrarily or in bad faith | Employer applied a transparent, formula-based assessment |
| No independent legal advice before signing release | Employee accepted release with full knowledge and legal advice |
The Role of the Employment Contract and Bonus Plan Language
The language of the employment contract and bonus plan is the starting point for any analysis, but it is rarely the ending point. Ontario courts are alert to the reality that bonus plan language is almost always drafted unilaterally by the employer, frequently in dense and technical language, and presented to employees on a take-it-or-leave-it basis at the start of employment.
Several important interpretive principles apply:
- Contra proferentem: Ambiguity is resolved against the drafter (usually the employer);
- Reasonable expectations: Courts consider what a reasonable employee would have understood the plan to mean when they accepted it;
- Course of dealing: Years of consistent bonus payments create an implied term that cannot be unilaterally stripped without clear notice;
- Entire agreement clauses: These clauses do not help employers where the plan itself is ambiguous;
- ESA floor: Any bonus plan language that purports to give the employer less than the ESA minimum entitlements is void.
Additionally, courts scrutinize the interaction between the bonus plan and the termination provisions of the employment contract. If the termination clause is found to be unenforceable (as is frequently the case in Ontario, where courts rigorously police compliance with the ESA), the entire clause structure may fall—including any bonus exclusion provisions tied to it.
ESA Entitlements vs. Common Law Entitlements
It is important to distinguish between two regimes that may apply to bonus claims on termination:
ESA Entitlements (Statutory Minimum)
Under the Employment Standards Act, 2000, wages—which include certain bonuses—must be paid through the ESA notice period. Whether a particular bonus qualifies as “wages” under the ESA depends on whether it was earned during the notice period and on the nature of the bonus plan. ESA entitlements are a floor; employees cannot contract out of them.
Common Law Entitlements (Reasonable Notice Period)
At common law, terminated employees are entitled to damages equivalent to all compensation they would have received during a reasonable notice period—including bonuses. The common law notice period is typically far longer than the ESA minimum and is calculated using the Bardal factors (age, length of service, character of employment, and availability of comparable employment). For senior Toronto employees with long tenure, common law notice of 18–24 months is not unusual, which often means bonus payment dates fall squarely within the notice period.
The practical significance: even if the ESA does not require the bonus to be paid, the common law may—and the common law notice period is almost always the more valuable claim.
Practical Steps If Your Bonus Was Withheld
If your employer has withheld a bonus after terminating your employment, take the following steps:
- Do not sign any separation agreement or release until you have obtained independent legal advice;
- Locate and preserve all documents relating to the bonus plan, including the plan document itself, any communications about bonus targets, and records of past bonus payments;
- Gather your T4s and pay stubs for the past three to five years, which will demonstrate the historical pattern of bonus payments;
- Preserve any communications in which the employer represented that you were on track for a bonus in the performance year;
- Note the timing of your termination relative to the performance period and the scheduled payment date;
- Contact Z Legal P.C. for an employment lawyer consultation as quickly as possible — Ontario’s two-year limitation period runs from the date of termination.
Frequently Asked Questions
My bonus plan says it is ‘entirely discretionary’ — does that mean I have no claim?
Not necessarily. Ontario courts have consistently held that the word ‘discretionary’ does not give employers unlimited licence to withhold bonuses arbitrarily, particularly on termination. Under the Matthews framework, if the bonus would have been paid during the notice period, you are presumptively entitled to it unless the contract clearly and unambiguously removes that right. ‘Entirely discretionary’ language alone is rarely sufficient to meet that standard.
I was terminated just before the bonus payment date. Can I still claim it?
Yes, potentially. If the bonus payment date falls within what a court would determine to be a reasonable notice period, and the bonus would have been payable had you continued working, you are likely entitled to it as part of your damages. The closer the termination was to the payment date, the stronger the claim typically is.
My employer says I need to be ‘actively employed’ on the payment date — is that enforceable?
Possibly not. Courts have held that ‘active employment’ clauses, while enforceable in some circumstances, must specifically and unambiguously address the termination scenario to oust common law entitlements. If the clause was not specifically drawn to your attention, or if it is part of a termination clause that is otherwise unenforceable under the ESA, it may not protect the employer.
Am I entitled to a prorated bonus if I was terminated partway through the performance year?
Potentially, yes. Courts have awarded prorated bonuses where the employee performed work throughout most of the performance period. The proration approach reflects the principle that the employer should not be enriched by the employee’s labour without compensating them for it.
What if the bonus plan was changed after I was hired?
Unilateral changes to a bonus plan by an employer after hire, without fresh consideration or notice, may not be binding. If the original bonus terms at the time of hire were more favourable, you may be entitled to rely on those terms. This is particularly important where an employer attempts to introduce a more restrictive plan shortly before a termination.
Does it matter whether I was terminated for cause?
Yes. Employees terminated for cause are generally not entitled to reasonable notice and therefore cannot rely on the notice period to claim bonuses payable during that window. However, most terminations in Ontario are not for cause — employers frequently allege cause but cannot sustain the high legal threshold required to prove it. If you were terminated and your employer is claiming cause, obtain legal advice immediately.
Disclaimer: This article is for general informational purposes only and does not constitute legal advice. Reading this article does not create a solicitor-client relationship with Z Legal P.C. Employment law is highly fact-specific and the outcome of any claim will depend on the particular circumstances of the employment relationship. If you have a specific legal issue, please consult a qualified employment lawyer.