An employment bonus, or sometimes referred to as incentive payment, are voluntary and non-contractual payments if they are truly discretionary.
Bonuses, if they are to be paid, should be, but sometimes are not, specifically addressed in the employment contract. Many employers simply include a clause declaring that any bonus paid is purely "discretionary". These clauses may also contain restrictions on the payment of future bonuses, such as that the employee must be actively employed at the time the bonus would ordinarily be considered and given by the employer. Of course, on termination, this often causes a dispute, because the employee may be terminated prior to when a bonus might otherwise be considered and paid for that employment year.
An important factor to consider is also whether the bonus was a recurring event – was it actually paid consistently over time, or was it a ‘one-off’ bonus? If it was paid consistently by the employer, there is more likelihood that a Court would find it was a recurring and important part of the employee’s regular compensation, even if it is labelled "discretionary" in the employment contract.
When an employee is terminated, particularly without cause, employers often take the position that any bonus previously paid is not payable for the employee’s reasonable notice period, because the bonus was "discretionary" by the employer, rather than required as part of the employee’s regular compensation plan.
However, simply calling a bonus "discretionary" in the employment contract does not insulate an employer from claims for bonus amounts by terminated employees.
Employers can limit bonus entitlement on termination by using clear, unambiguous contractual language. Therefore, if an employer uses bonuses in the workplace, 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. Any ambiguity most likely will be resolved against the employer.
To illustrate, in the Ontario case Grace v. Reader’s Digest Assn (Canada) Ltd. [1995], the Court held:
"The case law is clear that … where the employer seeks to rely on a term requiring the employee to meet certain conditions such as being on the payroll as of a certain date, the employer must communicate that requirement to the employee. If the employer has failed to do so, then the employee is entitled to claim the bonus."
If an employer pays a bonus in the workplace, the employer should ensure that: a) the rights and entitlements for the bonus are clearly and simply set out in the employee’s contract; and b) it has a bonus policy enacted, which is brought to the employee’s attention, that is consistent with the employment contract.
In Ontario these days, unless employers can point to clear, unambiguous language in the employment contract indicating that a bonus is not payable on a termination or resignation, most likely an employee will be able to successfully claim the bonus payment, including for a reasonable notice period on termination.
It is important, therefore, for employers to seek proper legal advice for their employment contracts, especially if bonuses are to be paid in the workplace. Simply declaring they will be "discretionary" is not likely sufficient.
Some important cases on this issue in Ontario:
Taggart v. Canada Life Assurance Co. [2005]
Grace v. Reader’s Digest Assn (Canada) Ltd. [1995]
Jivraj v. Strategic Maintenance Ltd. [2014] (This is an Alberta case, but has been applied in Ontario)
Chandaran v. National Bank of Canada [2011]
Both employers and employees should seek qualified legal counsel before entering into an employment contract in Ontario, or potentially face unintended litigation about the consequences of the relationship breaking down. Clarity, simplicity and compliance with the current law in Ontario are necessary and effective for enforceable employment contracts.
This WARDS PC BLAWG is for general information only. It is not legal advice, or intended to be. Specific or more information may be necessary before advice could be provided for your circumstances.
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