Spring is bonus time in many workplaces. And many employers
prefer to use "discretionary" bonuses rather than
establishing formal bonus plans.
But employers shouldn't be lulled into a false sense of
security merely because a bonus is "discretionary" and is
not established through a written employment contract and/or plan
document. The common law presumption is that terminated employees
are entitled to pay in lieu of reasonable notice based on their
total compensation. If a bonus is found to be integral to an
employee's compensation, then he or she will have a claim for
it as part of a wrongful dismissal action.
Employers who use discretionary bonuses need to be aware of the
main factors courts consider in determining whether a discretionary
bonus is an integral part of an employee's compensation:
Regularity: bonuses that are paid consistently over
time, perhaps at regular intervals, are more likely to be viewed by
courts as integral to compensation. Courts reason that employees
come to expect bonuses they consistently receive, and past practice
may have "changed a discretionary benefit into an integral
part of the wage structure". As few as two or three years'
history can suffice in some cases.
Value as a share of compensation: the bigger the bonus
is as a percentage of total compensation, the more likely a court
is to see it as a contractual right. The logic is that employers
and employees make trade-offs between fixed and variable
compensation, and where the variable compensation component is
large, a court will more readily assume it was meant to compensate
for lower fixed compensation and is therefore claimable.
Industry standards: where bonuses are an industry
standard and are necessary to attract and retain talent –
such as in financial services or similar industries – courts
are more likely to view the bonuses as a contractual
Courts will also impose a duty on employers to act fairly when
the amount of a bonus is discretionary. An employer cannot give an
arbitrarily low bonus amount where a bonus is considered integral
to compensation. Doing so may amount to constructive dismissal, and
a court will give damages for what it assesses an employee was
actually entitled to.
Once a judge has determined that a bonus is an integral part of
an employee's compensation, he or she will be loathe not to
include the bonus in damages for wrongful dismissal. Very clear
– if not harsh – language will be needed in order to
rebut the common law presumption of total compensation.
Using language in the employment contract and/or bonus plan that
says an employee "must be employed" at the time the bonus
is paid may not suffice. At common law, employees continue to be
employed until the end of the reasonable notice period, and are
entitled to be paid on the basis of their total compensation. The
fact that an employee has been terminated without reasonable notice
and, hence, a chance to earn the bonus, should not be the basis
upon which they are denied the bonus. Judges would perceive this as
allowing employers to profit from a breach of contract.
With this in mind, employers should clearly address an
employee's bonus entitlement in the event of resignation,
retirement, termination with cause, and termination without cause.
If an employer does not intend to pay bonuses to employees during
the reasonable notice period, this needs to be addressed directly
in the employment contract and in any bonus plan. Be wary that any
ambiguity will be resolved against the employer.
It is one thing to pay a small, one-off bonus as an act of
goodwill. But if an employer intends to establish regular and
significant bonus payments, treating those bonuses as
"discretionary" does not insulate an employer from claims
by terminated employees.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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