It is not uncommon for employers to offer prospective employees flexible remuneration schemes in addition to base salary. Ideally, individual and company performance-based incentives ensure the most effective use of talents while granting the employer the freedom to define the amount and the schedule of payment for such incentives. However, in practice, the implementation of bonus schemes has become a point of contention between employers and disgruntled employees.
An employee's right to receive a bonus varies depending on whether the bonus is a contractual or noncontractual entitlement. The distinction can be made clear when the relevant remuneration clauses are drafted with reference to guaranteed and discretionary bonuses.
Guaranteed bonuses and performance-based bonuses form part of the employee's contractual entitlement under an employment agreement. Where an employment agreement stipulates an agreed amount to be paid on a specific date, the courts have upheld such a clause to be binding on both parties. This remains the case regardless of whether the employee who disputes his entitlement to the guaranteed bonus is in employment at the date of the scheduled payment of the bonus or not. The courts have upheld not only the agreed amount of a bonus, but also the agreed schedule of payment of a bonus.
Such a contractual entitlement may also be expressed as an entitlement to participate in the bonus scheme of the employer or a specific formula for the calculation of the bonus. Courts have found that even where the amount of a bonus had not been discussed, the employer was under an obligation to consider in good faith the merit of the employee and issue a bonus payout accordingly. In such cases, courts have considered the experience and contribution of the employee, as well as the feedback the employee had received from the employer in the course of his employment. The onus is on the employer to show whether the employer had fulfilled certain agreed requirements for participation in a bonus payment, and thereafter the employer may have some discretion to determine the bonus amount and payment schedule (depending on the construction of the relevant clause).
Where a bonus entitlement is presented in less definite terms, i.e. where it is drafted as a discretionary bonus, the rights of an employee to a bonus payment are not as certain.
Where a bonus clause is constructed as a purely discretionary entitlement, such a clause will provide that the employer has an absolute discretion to determine not only the amount of the bonus, but also the entitlement of the employee to any bonus. In such cases, the right of the employee to a bonus is generally at the absolute discretion of the employer, who can even choose to not give the employee a bonus.
Ultimately, in determining whether an employee is entitled to a bonus, the court will look at the matrix of the facts surrounding the employment agreement. In cases where an employer uses a bonus to entice a prospective employee to leave their employment with another employer, the courts have found in favour of the employee. The courts have examined precontractual correspondence and negotiations between the parties to establish their mutual understanding prior to the execution of the employment agreement.
It is therefore important that an employer exercise caution when making representations as to bonus payments in an attempt to entice prospective employees and also in the wording of the terms of the employment contract relating to pay and bonuses. Generally, employers should have the employment contract drafted and/or reviewed by a lawyer to minimize the risk of a painful payout down the road if the employee does not work out.
Originally published by Duane Morris & Selvam LLP.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.