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Bonus Entitlement on Termination of Employment

August 25, 2015

In the recent case of Fraser v. Canerector Inc., a 46 year old senior executive employed for 2.8 years asserted that he was entitled to his year end bonus on the termination of his employment in June, 2014. Mr. Fraser was earning a salary of $205,000 per year plus benefits and participated in an executive bonus program. He claimed that his bonus entitlement was an integral part of his employment contract. The history of bonuses which Mr. Fraser received was $50,000 for his first part year, $75,000 for his second year, and $175,000 for his last full year in 2013.

The court denied that Mr. Fraser was entitled to any bonus on the termination of his employment. Reasonable notice of termination in Mr. Fraser’s case, as determined by the court, was 4.5 months. However, Mr. Fraser had found new employment quickly and was re-employed 11 weeks later. The court concluded that Mr. Fraser was not entitled to bonus monies for two reasons:

  • The bonus plan was fundamentally discretionary, subjective, and lacked any formula for calculation.
  • As the 4.5 months reasonable notice would only bring Mr. Fraser’s employment to October 25, 2014, he was ineligible to receive a bonus for the year 2014.

Generally, employees are entitled on termination of employment to compensation for lost bonus monies that they would have been entitled to receive during the period of reasonable notice of termination. Where the employment contract is silent as to bonus entitlement, whether orally or in writing, a determination will have to be made as to whether the bonus has become an integral part of the employee’s wage or salary structure. Courts will consider the following factors in determining whether bonus payments are a component of the employee’s overall compensation to which the employee is entitled upon termination of employment:

  • Whether the payment of bonuses is discretionary.
  • Whether the company has a formal bonus policy.
  • Whether a bonus is received each year and in what amounts.
  • The history of payment of bonuses and whether the employer failed to pay bonuses.
  • The basis upon which a bonus is calculated or determined including whether there is a necessary pre-condition that must exist to be eligible for a bonus (e.g., requirement of active employment on the bonus payment date).
  • Whether the bonus formed a significant component of the employee’s overall compensation.
  • The likelihood of whether the employer would pay any bonuses as a result of its financial situation or general business conditions.

Employers and employees can provide more certainty with respect to how bonuses will be construed on termination of employment by clearly setting out the bonus program in an employment contract.

Tags: Employment


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