Demystifying Bonuses, RSUs, and Stock Options Upon Termination in Ontario

Tony Wong
12 hours ago
10 min read

In the world of corporate terminations, base salary is often just the tip of the iceberg. The real financial battleground lies in Performance Incentive Plans (PIPs) and variable compensation—the cash bonuses, stock options, and Restricted Stock Units (RSUs) you have spent years earning.

Upon termination, your employer will likely point to a dense incentive plan and confidently claim that because you are no longer "actively employed," you forfeit it all.

Let’s take a forensic look at how these PIPs and equity grants actually hold up in Ontario courts, whether your employer can legally cut off your compensation during your severance period, and why the "active employment" clause is often a multi-million-dollar legal myth.

You might also be interested in a related Podcast "S01E14 - The Severance Myth: How to Keep Your RSUs and Bonuses After Termination"

I. The Anatomy of Performance Incentive Plans

To litigate your legal rights upon termination, we must first properly classify exactly what is in your compensation portfolio. The law does not treat all incentives equally.

1. Formulaic Cash Bonuses & Commissions (The "Metric-Based" Awards)

These are variable cash payouts tied to specific, objective, and measurable metrics. If you hit $1 million in individual sales, you get a $50,000 bonus. If the company hits a specific EBITDA target, you get 10% of your base salary. The formula is set.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric used to evaluate a company’s core operating performance and cash flow potential by excluding financing decisions, accounting practices, and tax environments. It is commonly used for comparing profitability across companies and industries.

2. "Discretionary" Bonuses (The Grey Area)

Employers love to draft bonus plans stating that payouts are made at the "sole and absolute discretion of management." They structure these without rigid formulas, hoping that if they fire you, they can simply choose not to pay you.

3. Stock Options (The Right to Buy)

A stock option is not a share of a company; it is the contractual right to purchase company stock at a pre-set price (the "strike price") after a certain period of time (the "vesting period"). If the company's value goes up over time, you exercise the option, buy the shares at the cheap strike price, sell them at the higher market price, and pocket the difference.

4. Restricted Stock Units (RSUs) (The Grant of Shares)

RSUs have largely replaced stock options as the modern corporate retention tool. Unlike options, you don't have to "buy" RSUs. They are a promise from the company to give you actual shares of stock (or the cash equivalent) on a future vesting date, provided you stay employed long enough. Once they vest, they hold value as long as the stock price is above zero.

II. Are PIPs Considered "Wages" Under the ESA?

In Ontario, the Employment Standards Act (ESA) establishes the absolute baseline of your rights. The critical dividing line is whether the law considers your incentive a "wage." If it is a wage, it is protected by an iron shield.

Formulaic Bonuses & Commissions = WAGES. If your bonus is tied to a formula, hours, production, or efficiency, it is legally a wage. Your employer must pay it if it was earned before termination. Furthermore, the ESA explicitly requires employers to calculate your minimum statutory termination pay using a strict 12-week look-back average that includes these earned bonuses and commissions. They cannot just pay out your base salary for your statutory notice period.
Purely Discretionary Gifts = NOT WAGES. The ESA explicitly excludes true "discretionary gifts or bonuses" from the definition of wages.
Stock Options and RSUs = NOT WAGES. This is vital. Ontario courts have definitively ruled that equity compensation does not fall under the ESA’s definition of wages or monetary remuneration.

Important Note: You might assume that because RSUs and discretionary bonuses aren't "wages" under the ESA, your employer can simply cancel them the day you are fired. This is a massive misconception. Employment law operates on two tracks: the ESA (the statutory basement) and the Common Law (the judge-made penthouse). What the ESA doesn't protect, the common law routinely catches.

III. The "Active Employment" Trap & The Reasonable Notice Period

When you are terminated without cause in Ontario, the common law dictates you are entitled to "reasonable notice"—a transitional runway that can last up to 24 months depending on your age, tenure, and position.

The law operates on a fundamental presumption for this notice period: You must be kept completely whole. The court pretends you are still sitting at your desk, working diligently every single day of that notice period.

Can an Employer Limit Your Bonus Entitlement to Only During "Active Employment"?

Employers desperately want to stop your bonuses and stocks from vesting during this massive window of time. To do so, they rely on boilerplate clauses that say: "You must be actively employed on the payout date to receive your bonus or vest your RSUs."

In the landmark case of Matthews v. Ocean Nutrition Canada Ltd. (2020 SCC 26), the Supreme Court of Canada declared that requiring "active employment" is a fatal drafting error. Why?

Because under the law, you are legally deemed to be "actively employed" for the entire duration of your reasonable notice period! A clause demanding active employment does not actually exclude you from getting paid during your severance period.

Can the Employer Control Whether the Plan Continues Running During the Reasonable Notice Period?

Yes, but it is incredibly difficult. To legally strip you of your incentives during your notice period, the employer must pass a rigorous two-step test:

The "But For" Test: But for being wrongfully terminated, would you have received the bonus or had your RSUs vest during your reasonable notice period? (If yes, you are entitled to it, unless the employer passes step 2).
The "Clear and Unambiguous" Test: Does the employment contract contain absolutely clear and unambiguous language taking away your common law right to damages?

To pass this test and stop the clock, the contract must expressly state that your rights cease immediately upon the provision of written notice of termination, and it must explicitly waive your right to claim common law damages. Because most corporate plans still lazily rely on the useless "active employment" phrase, they fail this strict standard, leaving the door wide open for us to claim your full bonus and stock value.

IV. Piercing the Veil of "Discretionary" Bonuses

Let’s return to the employer’s favorite shield: the word Discretionary.

HR departments draft plans calling a bonus "purely discretionary," hoping that if they fire you, they can simply choose not to pay it. In the courtroom, we call this "form over substance"—and judges despise it.

When determining your severance, Ontario courts will pierce the veil of this label using the "Integral Part of Compensation" test. The legal question is not what the contract calls the bonus; the test is the substantive reality of your employment. If a bonus is paid with historic regularity, forms a predictable component of your earnings, and tracks with your performance, the law deems it an integral part of your compensation.

Look at the highly instructive 2026 Ontario Superior Court decision in Adelman v. IBM Canada Limited (2026 ONSC 420). A senior executive with 18 years of service was fired just weeks before his annual bonus payout. The employer relied on internal policies to deny him the bonus, claiming it was entirely discretionary and he had separated before the payment date. The Court vehemently rejected this arbitrary denial. The judge ruled that because the bonus was an integral part of his livelihood, the employer had a legal duty of good faith to exercise its discretion fairly. They could not use his termination to rob him of a year of hard work. The court awarded him over $680,000 in total damages, expressly ordering the employer to pay damages for the lost "discretionary" bonuses and equity that would have naturally flowed during his massive 24-month common law notice period.

V. The Great Equity Divide – How Courts Treat RSUs vs. Cash

While the law on cash bonuses is heavily settled in favor of the employee under Matthews, Equity Compensation (RSUs and Options) is currently experiencing a massive judicial earthquake in Ontario.

Because RSUs are not strictly protected "wages" under the ESA, corporate lawyers have started burying RSU forfeiture clauses in entirely separate, standalone, U.S.-style commercial contracts, hoping to bypass Ontario employment laws altogether.

Right now, the courts are fiercely divided on this tactic, resulting in vastly different treatments:

**A. The Employer's Shield (Wigdor v. Facebook Canada Ltd., 2025 ONSC 4861**):

In this case, the court ruled in favor of the employer. Because RSUs aren't "wages" under the ESA, the court said an employer can use a totally separate, flawlessly drafted RSU commercial agreement to forfeit your shares on the exact day you are terminated. Even if your main employment contract's termination clause is deeply flawed and voided by a judge, a standalone RSU agreement can legally cut off your equity.

**B. The Employee's Sword (*Liggett v. Veeva Software Systems***, 2025 ONSC 7010):

Just months later, a different judge ruled the exact opposite to save the employee. The judge noted that the ESA strictly mandates that all wages and benefit plan contributions must continue during your absolute minimum statutory notice period (the first 1-8 weeks guaranteed by law). Therefore, any RSU plan that attempts to cut off your vesting on your last physical day of work inherently violates the ESA. Because it violated the ESA, the judge voided the complex forfeiture clause entirely and awarded the employee the full value of the stock that would have vested during their entire 6-month common law notice period.

C. What Does This Mean for You?

When two trial courts conflict, the Ontario Court of Appeal (ONCA) must step in to establish a single, binding rule. The Wigdor decision is currently under appeal, and the ONCA is scheduled to settle this massive legal showdown later in 2026. Until the Court of Appeal releases its final decision, RSU forfeiture clauses remain highly vulnerable to legal attack, giving employees incredible leverage in severance negotiations. If an employer tries to cancel your equity today, you can use the Liggett decision to mount a very strong legal argument that their contracts violate Ontario statutory standards.

VI. How to Turn Legal Uncertainty into Negotiation Leverage

When an employer hands you a severance package, they usually present the cancellation of your bonuses, RSUs, and stock options as a non-negotiable fact. They are relying on you taking their word for it, assuming the dense language in their incentive plan is legally bulletproof.

But as we’ve seen with the conflicting Wigdor and Liggett decisions, the law in Ontario is currently in a state of flux. This uncertainty is an employee's greatest weapon. Here is how you can use the pending Court of Appeal showdown to maximize your severance package:

1. Call the Employer's Bluff

Employers hate legal risk, and they hate setting expensive legal precedents even more. If your employer knows that their RSU forfeiture clause could potentially be struck down based on the Liggett decision, they are highly motivated to avoid going to court. You can use the threat of litigation—and the current ambiguity in the law—to push for a settlement.

2. Demand the Full Plan Documents

Never accept a severance offer based solely on a summary or a portal screenshot. Employers frequently fail to properly incorporate the actual, full-text incentive plan into your original employment contract. If they didn't bring the forfeiture clause to your attention when you signed the grant, or if the language is even slightly ambiguous, an employment lawyer can argue that the restrictive terms do not apply to you at all.

3. Negotiate for "Cash-in-Lieu" or Extended Vesting

Instead of walking away empty-handed, you can use these legal arguments to negotiate a compromise. Common and successful strategies include:

The Cash Equivalent: Asking the employer to calculate the value of the RSUs or bonuses that would have vested during your common-law notice period and adding that amount to your lump-sum severance payment.
Kept Whole: Negotiating an agreement where your equity continues to vest normally until the end of your severance period.

4. Set The Bottom Line - Take Advantage of the Uncertainty

Until the Ontario Court of Appeal officially rules on this issue, the enforceability of these plans is entirely up for debate. If you have significant unvested equity or a pending bonus, signing a standard release without pushing back means leaving potentially hundreds of thousands of dollars on the table.

VII. Conclusion: Don't Let Complex Contracts Intimidate You

If there is one crucial takeaway from this breakdown, let it be this: Never assume your employer’s interpretation of your incentive plan is the final legal word.

Corporate policies are often designed to limit the company's liability and intimidate you into accepting less than you deserve. But the reality in Ontario courts is very different. "Discretionary" bonuses are rarely purely discretionary. "Active employment" requirements are routinely struck down. And right now, RSU forfeiture clauses are standing on highly unstable legal ground.

The financial difference between accepting a standard HR severance offer and asserting your common law rights to your performance incentives can easily span hundreds of thousands of dollars.

Protect Your Compensation If you have been terminated, do not sign a release until a legal professional has reviewed your complete compensation portfolio. At HTW Law, we forensically audit your employment contracts, incentive plans, and RSU grants. We find the technical flaws in corporate drafting, pierce the "active employment" illusion, and leverage the latest case law to ensure your severance package reflects the true value of the work you performed.

Legal issues revolving around Performance Incentive Plans could be complicated. Consult with an experienced employment law firm such as HTW Law and secure the equity you’ve earned.

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With the right legal support, employees can ensure their employment law rights are protected; employers can avoid lawsuits.

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As an employee, you don't have to fight the battle alone. Speaking with an employment lawyer who is familiar with the laws and regulations regarding defamation, discrimination, harassment, wrongful termination, and constructive dismissal, employment contracts and employment law in general will go a long way. If you are in doubt, it's essential that you reach out for help as soon as possible right away.