Discretionary Bonus Payments and Employment Agreements
Upon the termination of an employee, the employee’s entitlement to discretionary bonus payments often becomes a contentious matter. Employees may claim that they are entitled to all or a portion of a discretionary bonus as part of their comprehensive termination package. Employers have addressed this issue by including language in the employment contract to the effect that a discretionary bonus will only be paid to an employee if said employee is employed on the date of payment. Implicit in this covenant is that if the employee is terminated before the date that bonus payments are to be paid, then the terminated employee will not be entitled to any part of the bonus payment.
The Employment Standards Act, 2000: Limits on Employees’ Entitlement to Discretionary Bonus Payments
In an employment contract, employers are entitled to set out the time or date by which a discretionary bonus payment may be paid out to employees. If an employee is not employed at that time, then the employee is not entitled to the discretionary bonus. Limiting an employee’s entitlement to the truly discretionary bonus payment in this manner does not violate the Employment Standards Act, 2000.[i]
The question for employers is, how can one limit an employee’s entitlement to discretionary bonus payments in a manner that is enforceable and will be upheld by the courts?
Are Terminated Employees Entitled to Unpaid Bonus Payments? Conditions in the Employment Contract
In Chandaran v. National Bank of Canada,[ii] the court found that the plaintiff, who had been wrongfully dismissed, was not entitled to participate in the bonus plan. Eligibility to the bonus plan was conditional on the employee being employed, both at the end of the fiscal year and when the bonus is paid. The court stated that in this case the “policy is clear and unambiguous and therefore its terms should prevail.”[iii]
Relying on Chandaran v. National Bank of Canada, it was argued that therefore, only employees that are actively employed at the time of payment are entitled to participate in bonus plans. The court in Wolfman v. Rocktenn-Container Canada, L.P.[iv] disagreed. In this case, there was no written agreement that stated that the payment of a bonus was conditional on the employee being employed. Therefore, absent of this language, employers may find themselves unexpectedly liable to pay out a discretionary bonus to terminated employees.
Continued Employment as Condition of Contract
In addition, the Court of Queen’s Bench of Alberta recently considered an employee’s rights regarding his entitlement to bonus payments in Jivraj v. Strategic Maintenance Ltd.[v] The employer and employee contractually agreed that the bonus to be awarded for the year 2011 would be paid in three equal installments (the “2011 Bonus”). Furthermore, the provision stated that all bonus payments are conditional upon the employee’s continued employment.
The employee was terminated in March 2012, only one installment of the 2011 Bonus had been made at that time. The employee argued that he was entitled to the remaining installments of the 2011 Bonus because he had “earned” the bonus in 2011. The Court disagreed and found that the contract was clear and unambiguous, “[h]owever unfair or one-sided it may seem in retrospect.” The employer and employee explicitly “agreed to an arrangement which required [the employee] to be reporting to work if he was to receive bonus installments.”[vi]
Lesson to Employers: Clear Contracts are Key
In both Ontario and Alberta, recent cases “make it very clear that parties may agree to forfeiture of accrued employment benefits, provided they do so in clear, unambiguous language.” As long as employers are acting within the Employment Standards Act, 2000; they can make the payment of discretionary bonuses conditional on various factors, such as continued employment at the time of payment. The key is to have explicit and express contract language.
Judicial trends in employment law and contract interpretation appear to consistently underscore the “imbalance of power” between employers and employees. Moreover, at common law, any ambiguities or unclear language in the employment contract will likely be interpreted in favour of the employee. As a result, the onus is on the employer to ensure contracts are clearly and properly drafted to comply with the Employment Standards Act, 2000 and the common law.
Act Now and Prevent Unexpected Liability Later
When addressing contentious issues such as discretionary bonuses in an employment contract, which are likely to become the subject of a future claim, it is very important to explicitly express the duties of the employers and the rights of the employees upon termination. If an employee is forfeiting an employment benefit, clear and unambiguous language is necessary to ensure the provision is enforceable. A well-drafted and properly executed employment contract can shield employers from these types of costly claims and unexpected liability, post-termination.
Prepared with the assistance of Cassandra Da Re, Student-at-Law.
Christina J. Wallis is a Partner with specific expertise in the area of Employment Law at Dale & Lessmann LLP, a Toronto, Ontario, Canada, a full service business law firm. To speak to Christina please call 416-369-7832 or send an email message to her at mailto:firstname.lastname@example.org.
[i] SO 2000, c 41.
[ii] 2011 ONSC 4369.
[iii] Ibid, para119.
[iv] 2015 ONSC 1432.
[v] 2014 ABQB 463.
[vi] Ibid para 67.