Monday October 14, 2019
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What’s in a Bonus?

bonus plan

In the employment context bonuses can either be discretionary or non-discretionary.

A discretionary bonus is completely unexpected.  Unexpected as to timing, dollar value and kind of performance needed to receive one.  They have no established formula, are not part of an employee’s contract, there is no expectation to receive one regularly and as such it does not constitute either a meaningful or expected part of an employee’s total compensation package.

What is a non-discretionary bonus?  Well, it’s completely expected.  Such bonuses are calculated based on a set formula with established criteria that measure positive performance and results.  They are commonly used to incentivize employees to maximize performance and provide ongoing contributions to the company.

Generally only non-discretionary bonuses are considered to be “wages” accrued under the Employment Standards Act, 2000 (the “Act”) while generally only non-discretionary bonuses are considered (without something more) to be part of an employee’s total compensation package.

Why generally?  What challenges do you face in providing bonuses?

While the Christmas bonus dollar amount may be set based on how generous an employer may feel at the time of payment, if this bonus is habitually paid out at the same time every year, the known dollar range is linked to the employee’s performance over the year and this bonus becomes an expected and meaningful component of the employee’s compensation package – it looses its character as “discretionary” and becomes “wages” under the Act as well as part of the calculation of an employee’s reasonable notice entitlements unless you have a written bonus plan that limits an employee’s entitlement to any bonus payment to active employment and excludes any calculation of a bonus as part of the employee’s reasonable notice entitlements – which often is not done for a “discretionary” bonus.

Companies should ensure their bonus plans are up to date with the latest legal developments.  As with termination clauses and profit-sharing plans, the courts are always wrangling with the best way to approach these issues and there will be “developments” in the law.

Not having a bonus plan clearly worded to establish your intentions can lead to problems.  Many employers intended to structure bonus payouts for positive performance to their employees’ active employment status (and continued performance and contributions).  If a bonus plan does not clearly and unequivocally make it clear that an employee has to be “actively” employed at the time of payout as a precondition to such payment, an employer will be required to pay such bonuses going forwards and backwards.  Meaning, a company will need to make a pro rata payment as part of their total compensation package during their reasonable notice period and as “wages” accrued prior to the employee’s termination or resignation in accordance with the Act.

The most recent Ontario case on this issue is from our Court of Appeal (OCA) in July 2019 in Manastersky v. Royal Bank of Canada, 2019 ONCA 609.  The issue in this case was whether Manastersky was entitled to any bonus payment following the termination of his employment under the wording of RBC’s non-discretionary bonus plan (which required active employment at the time of payment).  The lower court awarded a bonus payout of over $950,000.00 for Manastersky’s lost opportunity to earn this bonus. The OCA overturned the lower court’s decision finding that the plan’s wording on entitlement was clear and unequivocal.  As such, Manastersky was not entitled to any further bonus payment following the termination of his employment.

Bonus plans are for a set timeframe – usually a fiscal year or a calendar year.  You can completely undermine the enforceability of the protections from liability built into such plans if you do not properly bring them to the affected employees’ attention before the period in which employees are intended to earn it.  This is particularly the case where the plans have been altered and have reduced the affected employees’ entitlements (e.g., bonus %s, higher targets, introduction of a requirement that the employee being actively employed at the time of payout).

As always, know the law and how it can work for you to limit your exposure before taking action.  Knowledge is power when we apply and use it.

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  • What’s in a Bonus?

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