Bonuses can be either discretionary or non-discretionary. As a general rule, non-discretionary bonuses are based on a formula and set criteria for positive performance. They are payable to a terminated employee as part of an employee’s entitlement upon termination as either accrued and expected “wages” under the Employment Standards Act, 2000 or as part of their entitlement to reasonable notice based on their total compensation packages under the common law. To the contrary, non-discretionary bonuses are unexpected and not “payable” as they have no established formula, are not part of an employee’s contract, and there is no expectation to receive such a bonus regularly.
Bonus payments under a non-discretionary bonus plan are commonly used to incentivize employees to maximize their performance and ongoing contributions. In doing so, most employers devise a bonus structure that links the obligation to pay out a bonus to their employees’ active employment status (and continued performance and contributions). However, where the bonus plans are not sufficiently clear in making “active” employment a precondition to their payout, employers unfortunately have been required to pay such bonuses to terminated employees as “wages” or as part of their reasonable notice entitlement despite their bonus plans’ intended preconditions. There have been numerous cases in which our courts have addressed the need for employers to carefully draft their non-discretionary bonus plans to avoid payout to employees who are no longer actively employed.
The most recent case is from the Ontario Court of Appeal (“OCA”) in July 2019 in the decision of Manastersky v. Royal Bank of Canada, 2019 ONCA 609. In this case RBC’s former employee, Manastersky, sued and obtained judgment in the lower court for payment of over $950,000.00 for the loss of opportunity to earn a bonus. The OCA disagreed with the lower court’s decision and found that the bonus plan language was “clear and unequivocal” that Manastersky was not entitled to any further bonus payment following the termination of his employment. In the result, Manastersky received nothing in respect of bonus. The Manastersky decision demonstrates that a well-crafted bonus plan can insulate an employer from liability in respect of bonus plan payout to terminated (or resigned) employees.
The Pitfalls Employers Frequently Face In Relation to Bonus Payouts:
1. Specifically identified “discretionary” bonus plans may be found by the courts to be “non-discretionary” and payouts ordered.
This may be the result of not having any written bonus plan whatsoever, an outdated written bonus plan (i.e., not updated to reflect changes in the law on the issue of bonuses) or, over time, either measuring performance based on defined criteria (making them non-discretionary) or creating an expectation of a set payment as part of their overall compensation package.
2. Employees never acknowledged the bonus plan prior to the start of the bonus term.
In such case, even if the bonus plan has robust protections for the employer, the employer may not be able to take advantage of such protections unless it can prove that the employee was knowledgeable about its terms and any changes from the last bonus plan.
3. Even where an employer has a written bonus plan and the employee has acknowledged it, it is still possible for a court to consider the bonus non-discretionary.
A bonus is more likely to be considered discretionary where:
● the payment of the bonus is not linked to an employee’s performance;
● the bonus is not habitually paid out each year; and importantly,
● the bonus does not comprise a meaningful component of an employee’s total compensation.
An employer without an updated written bonus plan that has been properly brought to its employee’s attention risks exposure on two fronts in respect of former employees. First, an employee who has been terminated (or resigned) before a bonus payment becomes due may make a claim for the pro-rated portion of the bonus earned prior to termination as earned “wages”. Second, such an employee can also claim for the loss of opportunity to earn a bonus during the employee’s common law reasonable notice period. This exposure forward and backward can be quite significant.
The best and strongest protection an employer has against the exposure to such a risk is a 2 step process: 1) ensure that it updates and regularly reviews its written bonus plans to reflect the current state of the law; and then 2) specifically introduce and have their employees acknowledge the updated bonus plan before the commencement of its applicable bonus period.
In doing so, the plan must include language that clearly and unequivocally: (a) provides that no bonus under the plan will be paid out to an employee not actively employed by the employer; and (b) excludes the bonus from any assessment of an employee’s reasonable notice entitlements.
If your organization has a bonus plan, is looking to implement or amend its bonus plan – do not take the issue lightly. It is critical that the language used in the bonus plan be carefully considered and implemented as its wording and how it is introduced can mean the difference between minimal and significant financial exposure for your organization.
Disclaimer: Information made available in this article is provided for general information purposes only and is provided without representation for its accuracy or completeness. It is not legal advice and should not be relied upon. You should not take any action or fail to take any action based on the information set out in this article or on this website. Consult a lawyer at Sullivan Mahoney LLP and seek professional legal advice tailored to your unique situation.