As we look towards the start of the New Year, most employees’ minds are turning to one thing and one thing only. Unfortunately for you, it’s not the company’s Q1 strategy, or the plans for growth in the coming months.
In their minds, it’s bonus time.
While companies at one time were known for giving employees a small token holiday bonus, for most employers today the bonus has become an integral part of compensation. Most are awarded in the first few months of the new year and are based upon a combination of the employee’s performance, and the company’s performance, in the prior year. Amounts may vary, but for many employees it becomes a significant portion of their overall compensation.
So, what do employers need to know about bonuses?
Bonuses aren’t mandatory, but…
No, there is no law in any of the employment statutes that employers are required to pay employees a bonus. The word ‘bonus’ comes from the Latin word for ‘good,’ and is usually meant, at least at its origins, to reflect good work. Much like tipping at a service counter, while bonuses are appreciated, they are not mandatory.
However (and this part is crucial), bonuses that are part of an employment agreement are mandatory. If your employment contract specifically states that an employee will receive an annual bonus, and provides the terms for that bonus, then the bonus becomes part of their compensation. Many commissioned employees will seek out positions that reward their initiative with a great bonus structure for exactly this reason.
You can structure bonuses as variable based upon performance if those metrics are made clear. So, for example, if the employee had a bad year, or the company had a bad year, one year’s bonus may be higher or lower than the year before. The wording of course needs to be explicitly clear within the agreement that this is allowed.
What employers cannot do is decide to take away promised bonuses arbitrarily. If an employee has a contractual bonus, and you decide on a whim not to award it, you have made a significant change to their compensation, and you’ve done so singlehandedly. The employee may claim constructive dismissal, and if it went before a judge, they may just be successful.
What happens if an employee quits?
Most employees, if they are making secret plans to resign, will often hang on until their bonus from the previous year is awarded before making a hasty exit. After all, they’re watching the calendar closely, and do not want to put themselves in a position where they jeopardize that extra pay.
Yet if an employee quits early into the new year, does that sacrifice the bonus that they’ve earned from their previous year’s work? The answer is potentially, but that is not automatic. The language of your bonus plan needs to be written carefully, and it can spell out exactly what happens in these situations.
What if the employee was fired?
If an employee was dismissed before bonuses were paid out, the employee will understandably be
frustrated. They will likely consult with an employment lawyer, who will explain that they need not worry. Even if they are not working at bonus time, that does not automatically disentitle them from their bonus.
When an employee is terminated without cause, they are entitled to reasonable notice of termination or pay in lieu of notice. In plain language, this means that the employer is responsible for keeping them whole for a reasonable period of time, or until they can find comparable new work. ‘Keeping them whole’ includes paying them as though they were still working – in other words their total compensation, including salary, benefits, and even their bonus.
For many years, the default presumption in the law was that employees who were let go would be entitled to their bonus, however, employers were not entirely without hope. They could override this presumption with some carefully written language in the employee’s bonus plan, declaring that employees need to be ‘actively employed’ at the time that bonuses were paid out, or that bonuses could be denied unless they were a crucial feature of employment.
This created a sort of grey area in the law, with employers and their legal counsel wrestling with the wording of these bonus plans to avoid paying out large-scale bonuses to departing employees. However, in 2020 the Supreme Court weighed in, and decided to put their collective feet down.
In a case called Matthews v. Ocean Nutrition Canada Ltd., an employee was found to be entitled to a fairly significant LTIP payment when his former employer company was sold after his departure. The Court reasoned that, had Mr. Matthews still been working for the company at the time, he would have been able to collect on that payment without issue.
The Court ruled that this principle holds broadly for these sorts of payouts. The Court ruled that “language requiring an employee to be “full-time” or “active”, such as clause 2.03, will not suffice to remove an employee’s common law right to damages. After all, had Mr. Matthews been given proper notice, he would have been “full-time” or “actively employed” throughout the reasonable notice period.”
The decision represented a significant change for employers. Unless the wording is absolutely and explicitly clear, it is unlikely that a simple clause (even a well-crafted one) will get employers’ out of their bonus obligations.
Final Thoughts
As an employer, making the right moves is key, and making the wrong moves can be costly. Working with an employment lawyer before making any major decisions can help mitigate your risks, and lower the odds of costly litigation.
Contact us today to learn more about how we can help.
