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Bonus Season is Upon Us! What Do You Need to Know?

Jessica Gibson

Associate
April 5, 2022

Bonuses Generally

A bonus is often a quarterly lump-sum cash payment that an employer can provide to an employee in addition to the employee’s base salary. The amount of bonus paid by an employer can be discretionary but is typically related to how well the company has performed and how well the employee has performed during the current or previous year.

Bonuses may be regarded as voluntary and non-contractual payments if they are truly discretionary.  However, merely calling a bonus “discretionary” in the employment contract does not insulate an employer from claims for bonus amounts by terminated employees. The rights and obligations under a bonus plan are generally determined by the terms of the agreement. Employers can limit an employee’s bonus entitlement upon termination by using clear, unambiguous contractual language.

Terminations: The Critical Importance of Clear and Unambiguous Language

If an employer does not intend to pay bonuses to employees during the reasonable notice period (the period where severance pay is calculated), this needs to be addressed directly in the employment contract and in any bonus plan. Ambiguity in the terms of the agreement regarding bonuses will almost certainly be resolved against the employer to the benefit of the employee.

The case law is clear that if an employer seeks to rely on a term requiring the employee to meet certain conditions such as being employed as of a certain date to receive a bonus, the employer must communicate that requirement to the employee. If the employer fails to clearly communicate the condition for the bonus, then the employee is entitled to claim the bonus in addition to any severance they may be owed.

Examples in Case Law

For example, there is a case from Ontario where the term of the bonus plan specified that to be eligible for an annual bonus, an employee must “be employed by the Company at the end of the fiscal year” and “be employed by the Company when the bonus is paid.” The Court stated that in this case the “policy is clear and unambiguous and therefore its terms should prevail, and therefore, upon termination, the employee was not eligible to receive a bonus payment in their severance package.[1]

Another case, however, demonstrates that if the language is not clear and unambiguous, the decision can go the other way. The terms of the agreement in this case, only indicated that “participants must be full time salaried employees” to receive the bonus. The Court found that there was nothing in the bonus agreement that specifically excluded an employee who is terminated without cause before the end of the fiscal year from participating in the bonus plan. The employee was therefore entitled to a bonus payment as a part of their severance package.[2]

Another bonus agreement specified that employees are eligible for a bonus only if they are “actively employed by the Company on the date of the bonus payout”. Employees in this agreement were eligible to receive a bonus on two conditions; if the employee met his or her personal objectives (as determined by management), and if the company’s performance met their overall corporate objectives. The employee in this case was wrongfully dismissed. On appeal, the Court stated that when awarding damages for wrongful dismissal, the starting principle is that the dismissed employee is entitled to compensation for all losses arising from the employer’s breach of contract. The breach of contract in this case was the employer failing to give adequate notice to the employee of their termination.

When determining the quantum of damages, Courts typically include all of the compensation that the employee would have earned during the notice period, including the employee’s bonus. The Court in this wrongful dismissal case found that the term, “active employment” was not sufficiently clear to deprive the employee of his claim to a bonus that he would have received had he not been wrongfully dismissed. The employee was granted compensation for the loss of bonus for the length of his notice period, which was an added $58,386.64 to the judgment he obtained against his former employer![3]

Recent Employment Law decisions all confirm that clarity is key in limiting liability for payment of bonus upon termination. Employers must use explicit language when defining the bonus criteria, the payment dates, and the entitlement, if any, applicable in the event of resignation, retirement, termination with cause, and termination without cause.

Entitlement to Bonus Upon Termination

Factors which have been used in Courts across Canada to determine whether an employee will be entitled to a discretionary bonus if they have been wrongfully dismissed are:

1.      A bonus was received in previous years;

2.      Bonuses were required in order to remain competitive with other employers;

3.      Bonuses were historically awarded and the employer had never exercised his or her discretion against the employee; and

4.      The bonus constituted a significant component of the employee’s overall compensation.

Where a bonus is an integral part of an employee’s compensation, it is more likely that the employer will be responsible for payment of the bonus to the employee upon termination of employment. In the alternative, the employer may be responsible for an amount that reflects the loss of opportunity for the employee to earn a bonus. In determining the amount of loss, the Court will look at the amount of prior bonuses or incentive compensation paid to the employee.

These cases demonstrate the importance of written employment contracts and policies that clearly define any limitations on the payment of bonuses upon termination of employment.

 

If you are interested in adding a bonus plan to your employment agreements and are unsure what language to use or you need to understand your rights around bonusing, please reach out to us!

 

[1] Chandaran v National Bank of Canada, 2011 ONSC 777 at para 118.

[2] Wolfman v Rocktenn-Container Canada, LP 2015 ONSC 1432 at para 29.

[3] Paquette v TeraGo Networks Inc., 2016 ONCA 618