Bonus if necessary, but not necessarily a bonus

There are lots of good reasons to pay bonuses, but employers need to be wary of the difference between discretionary and automatic ones

Stuart Rudner

By Stuart Rudner

When it comes to bonuses, I have seen many employers using employment agreements that are either unnecessarily generous or too ambiguous to be meaningful.

Employment standards legislation imposes many obligations on employers that cannot be avoided. I recognize that, in some instances, it will be appropriate and strategic to provide for bonuses, but I am surprised at the number of organizations that do so without full consideration of the costs and benefits.

Regular readers will know I advise employers to use employment agreements routinely. However, the intent is to provide the organization with rights it might not otherwise have had and to minimize or clarify obligations. I am puzzled by the number of organizations that obligate themselves further, for no apparent reason.

Legally, there is an important distinction between discretionary bonuses and automatic bonuses. Obviously, discretionary bonus policies allow flexibility in determining if and when to pay bonuses, and how much to pay, with no obligation to do so. The employee will have no “right” to specific payments at specific times.

At the opposite end of the spectrum, some bonus provisions are quite specific. For example, “the individual will receive a bonus equal to 25 per cent of base salary if a specific sales threshold is achieved.”

In such circumstances, there is no discretion or flexibility. If the sales threshold is achieved, the bonus must be paid.

Some organizations employ complex formulae that consider company performance as well as individual performance. If that is spelled out in the employment agreement, or implicitly made to be part of the agreement through past performance, then the employer will be bound by it and cannot, for example, choose not to pay a bonus in a bad year.

When I see clients proposing guaranteed bonus clauses, I always ask whether there is a good business reason to commit the organization in that way. In some industries, and for some positions, it will be necessary in order to attract the best candidates and provide appropriate motivation. However, in many circumstances, there is little or no benefit to binding the company to such a scheme.

In some cases, I have seen unintentionally ambiguous bonus clauses. For example, "target bonus of 40 per cent." I am not sure what that is intended to mean, and I suspect the parties may not share the same interpretation. It would not appear to be a guaranteed bonus of 40 per cent, but also does not provide any guidance as to how the "target" is to be achieved. Rather than using such ambiguous language, organizations should adopt a purely discretionary approach.

The language I usually recommend is something like this:

“The organization may, at its sole discretion, pay bonuses to you from time to time. You agree that the organization has no obligation to do so, and that payment of any bonus does not create a future obligation to pay further bonuses.”

One other issue that arises frequently regarding bonuses is what will happen if the individual resigns or is dismissed before bonuses are paid out. There is no shortage of cases on this issue, the most recent being Szczypiorkowski v. Coast Capital Savings Credit Union.

In that case, the defendant relied upon its bonus guidelines, which required that “the employee must be in the employ of the Credit Union… in order to be eligible to participate.”

As a result, the defendant’s position was the bonus should not be included in the calculation of pay in lieu of notice. However, the court found as follows:

“Based on Mr. Szczypiorkowski regularly receiving a bonus in the past, it is reasonable to assume that he would have continued to receive a bonus if he had continued his employment with the defendant.”

The court also considered the previous case of Ferguson v. Kodak Canada Inc., where the court, in considering a similar bonus clause, held as follows:

“In my view, the clause was not designed to meet the situation of a wrongfully dismissed employee who was deprived of the opportunity to work. He is entitled to be compensated by an award of damages that puts him in the position he would have been in had reasonable notice been provided.”

Given the reasonable expectation the plaintiff would have received a bonus, the court ordered that it be included in the damages award.

I encourage employers to consider whether they need to guarantee bonuses in order to attract candidates, or whether they can reserve discretion regarding when and how much to pay. I also encourage employers to consider, at the hiring stage, what will happen at the end of the relationship.

Stuart Rudner is a partner with Miller Thomson LLP in Ontario, specializing in employment law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at (905) 415-6767 or You can also follow him on Twitter @CanadianHRLaw, join his Canadian Employment Law Group on LinkedIn, and connect with him on Google+.

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