Employment Law: Understand the Bonus Policy

By Constance Olsheski

Bonuses appear to be a perfect way to recognize the success of meeting budget expectations or of surpassing quotas, or of partaking in the Christmas spirit. In the goodwill of the moment, employers pay scant heed to how courts may view such payments -- when asked to do so by disgruntled employees.

If an employee resigns prior to the payout of a bonus, is the employee still entitled to that bonus? This was the legal issue debated at the trial of George Petty and Telus Corporation following his resignation as its Chief Executive Officer. Telus argued that as Petty was no longer an employee when the “short-term incentive” compensation was paid months after his resignation, he was not entitled to it. Petty successfully countered that such compensation was based on individual performance achieved before his departure and on pre-set corporate targets, which had been met. He was awarded $477,787.00.

If a sale is completed after the employee’s departure, is he still entitled to the commission or bonus that would attach to such sale? The court addressing similar circumstances awarded the employee the bonus as the wording of the policy specified the objective to be met - that being the completion of the sale. The fact that the employee was not employed at the time of completion of the sale did not undermine his right to be paid the bonus.

The extent of a terminated employee’s entitlement to a bonus has been the subject of many trials. Despite vigorous employer objections courts have frequently decided in favour of the employee. This litigation has identified the following principles regarding the entitlement of a departed employee to a bonus, of which you should be mindful.

Bonuses will likely be awarded in situations where:

• they are reasonably anticipated by employees and have been provided both regularly and in predictable amounts;
• they formed an integral part of the employee’s compensation and particularly where the overall package was designed to be light on salary and heavy on performance issues;
• the criteria for payment is clearly measurable and based on company and/or individual performance, all of which has been met; and
• they have been paid to most employees.

Bonuses will likely NOT be awarded to terminated employees in the following circumstances:

• where bonuses are based solely on the discretion of management and where no objective measurements have been identified;
• where bonuses are only incidental to an employee’s overall compensation;
• where the bonus is completely gratuitous;
• where the policy strictly prohibits the payment to employees who are no longer actively employed;
• where the company has acted reasonably in exercising its discretion and honestly and in good faith in restricting its payment;
• where objective criteria for the entitlement to the bonus have not been met;
• where the objective criteria for entitlement and payout is beyond the notice period;
• where an employee has not received a bonus annually; and
• if the bonus was introduced just prior to the termination of the employee and was not an integral part of the compensation plan.

Incorporating the above principles into your bonus policy can reduce the likelihood of litigation and should the issue proceed to trial, can reduce your liability for its payment.

 

For more information or to arrange a telephone consultation or a visit to our offices in Toronto, Ottawa or Vancouver, please visit www.canadaemploymentlaw.com.