Pulling back bonuses has its perils: Experts

eHealth Ontario bows to public pressure, rescinds merit raises
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 07/19/2011

An employer’s decision to rescind bonuses and merit raises, as seen recently at eHealth Ontario, treads treacherous waters, both from a legal and governance standpoint, say experts.

In the third week of May, many employees at the government agency — dedicated to building electronic health records for the province — were informed they would be given merit raises up to 1.9 per cent or bonuses up to 7.8 per cent. However, scathing media reports led to the withdrawal of the offer a few days later.

“On many levels, I’m absolutely floored by what happened here,” said Bob Levasseur, senior consultant and principal at McDowall and Associates in Toronto. “It’s extremely rare — I can’t think of management making a decision and then, after the fact, having what is basically the drain plug pulled and that’s that.”

The bonuses were meant to reward the progress made in turning around the agency, according to eHealth CEO Greg Reed. But that did not sit well with Health Minister Deb Matthews.

“We are in a challenging fiscal time — everybody knows that. They need to look at this through the lens of the taxpayers,” said Matthews in the Toronto Star.

So the bonuses and merit raises were withdrawn. When “placed in the context of the hard work eHealth Ontario still has to do in overcoming past challenges, and in light of the pressing financial circumstances that all Ontarians face, it is clear that this decision needs to be revisited,” Reed said in a statement.

While the provincial government did implement a two-year wage freeze for public sector workers, merit pay and raises are allowed in the legislation, said Levasseur. eHealth did nothing to contravene those guidelines yet, because of media and public pressure, the issue of pay practices — as seen in 2009 when an auditor general report revealed $1 billion had been misspent at the agency — exploded again.

“I understand there were some scandals with them but how long are they going to pay for this?” he said. “These folks are kind of between a rock and a hard place and when I see the minister of health come out with a big stick like that, it seems to me it flies in the face of their governance structure.”

The board just didn’t seem to figure at all, said Levasseur.

“It’s absolutely incredible,” he said. “It’s like an institutional investor going to one of the big banks and saying, ‘Don’t pay the bonuses this year.’”

When it comes to bonuses or merit increases specifically, this kind of situation is not that common, said Claudine Kapel, principle of Kapel and Associates in Toronto. But, from a broader employment deal perspective, breakdowns in communication or commitments often happen, in both big and small ways.

“Promises are made but, as circumstances play out, the commitments cannot be kept,” she said.

For example, a manager keen to entice a job candidate may sweeten the job offer in a way that doesn’t align with corporate policy or a manager keen to retain an employee might make promises about what the employee can expect in the future at the company, even though the manager may not be authorized to make those kinds of guarantees.

“Sometimes, things happen — either a leader or manager thinks they have authority but they don’t really or they might not realize there are policies that are corporate or global that run counter to what they want to do. Or sometimes they lose sight of things in the moment and make a commitment to solving a specific problem without realizing there are these broader implications,” said Kapel.

Legal implications

But there are several legal implications to the withdrawal of a bonus. If, from the outset, an employment contract states compensation is partly made up of base salary and partly made up of a bonus, totally removing that bonus could see an employer sued, said Ellen Low, an associate lawyer at Whitten and Lublin in Toronto.

“If the bonus is an integral part of an employee’s compensation package, so in the contractual rights from the outset of employment, refusing to provide it or unilaterally changing it substantially could leave the employer vulnerable to a constructive dismissal argument,” she said.

If an employer makes a promise it doesn’t fulfill and employees reasonably relied on it, negligent misrepresentation is also possible, said Low.

“Most sophisticated employers know that promising an employee something that they can’t fulfill leaves them pretty vulnerable for lawsuits.”

There’s also the issue of verbal promises, she said. Telling an employee “We think you might get a bonus if you get this project completed on time” could create a binding contract through verbal representation. “Employers have to be very careful about what it is you’re promising and what it is you’re saying,” said Low.

And if the bonuses are promised to all employees in their employment contracts and those bonuses are yanked, they may have a case for a class-action lawsuit, said Levasseur.

But with eHealth, it’s not for an egregious amount of money, he said.

“I’m not sure whether a judge hearing this kind of case would perceive this as being material,” he said. “It’s kind of like suing Best Buy because you weren’t happy with your iPod.”

Some employment contracts might include bonus language such as “We may at our sole discretion award a performance-based bonus,” said Low.

More employers are looking at discretionary bonuses, she said. That means the rewarding of the bonus is within the purview of the employer, exclusively. It may, in part, be based on an employee’s performance and in part be based on company performance but deciding whether or not to award the bonus is entirely up to the employer.

“More and more employers are using very careful language to indicate that all bonuses are discretionary,” said Low.

Organizations also need to be careful when it comes to the finer details, she said. That means having the answers to various questions:

• When is it payable?

• Do you still have to be actively employed or, if paid during a common law notice period but not longer actively employed with the organization, are you still entitled to payment?

• If someone is on short- or long-term disability and not actively employed, does he still qualify for a bonus?

“A lot of times, in the absence of very clear language, we would be arguing on the employee’s behalf for a pro-rated bonus based on the contributions to date,” said Low.

And annual bonuses also present a challenge. If employees receive bonuses every year in December, that could become an implied term of the contractual employment relationship, said Low. And if an employee is terminated before December, he may be entitled to a pro-rated bonus for his contributions for that year, she said.

“For the employer, bonuses can be a really nice thing but, from our perspective, you have to be very careful and very concise and very clear in terms of your language about who qualifies, when they qualify, when will it be paid out.”

It’s always good to have clear, codified plans and policies that really help drive the consistency and manage the expectations of individuals about an organization’s commitments and right to change its mind, said Kapel.

“It’s always cleaner when that’s in writing and everybody is aware of it upfront, before situations like this happen.”

HR’s role

This is also an opportunity for HR to have clearly documented policies that address how decisions are made and how programs are administered. They should also ensure leaders and managers are trained on how to administer those programs, including the approval process, so they act and speak in one voice, she said.

“The crux of the issue is to have clarity upfront by all the stakeholders, whoever they might be, in terms of what is the process to be used, what are the levels of authority and the approval process for these kinds of decisions to be made.”

Finally, there’s also the issue of employee morale when a situation like that at eHealth occurs. When leaders go back on their word, for whatever reason or however well-intentioned, they create a breach of trust, said Kapel.

“Depending on the severity, that fracture can have all these different consequences, including lower morale, reduced productivity or higher turnover or even a heightened interest in unionization.”

So, the morning after such an announcement is made, it’s important for the employer to focus on communications with the people affected, explaining the reasons why, she said.

“Sometimes, there might be a compelling reason why a promise was broken and employees can accept that and move on but, sometimes, there may be more need for damage control, especially if you have a larger number of people affected.”

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