Bonus Entitlement On The Basis Of Reasonable Expectation
Monday, November 18, 2019 - Filed in: Court Cases
A discretionary bonus may not be discretionary upon termination of employment. If a bonus has become an integral part of an employee's compensation, an employee may be entitled to that bonus during a reasonable notice period. In making this determination, courts will consider factors such as whether a bonus is received each year, whether bonuses were historically awarded, whether the employer had ever exercised discretion against the employee and whether the bonus constituted a significant component of the employee's overall compensation.
In a recent decision, the BC Supreme Court found that where, over the course of employment, a discretionary bonus has been awarded in a way that leads the employee to believe that the discretion will be exercised in the employee's favour, an employer's refusal to pay the bonus in a manner that is not fair or transparent can lead to a finding that the employer has breached the employee's contractual rights.
In Thoma v. Schaefer Elevator Components Inc., 2019 BCSC 100, the employee, B.T., entered into a fixed-term employment contract with Schaefer Elevator for five years. In addition to his base salary, the employee was to receive an annual bonus of "up to" $24,000 per year based on "agreed upon targets" and his "degree of achievement" of those targets. The employment contract provided that Schaefer Elevator had the right to terminate the employment contract on six months' notice and that in the event of termination, the employee would be provided with "contractually agreed remuneration during the six-month notice period".
B.T.'s employment was terminated in October 2017 and he was paid six months' base salary. He sought damages for breach of contract arising out of the termination of his employment. He argued that Schaefer Elevator failed to provide him with his full amount of remuneration to which he was entitled to under the contract in the final year of his employment in 2017, and during the six-month notice period. He claimed that the annual bonus formed an integral part of his compensation, and based on past conduct of the employer in paying out bonuses when the preconditions were not fulfilled, he had a reasonable expectation that the employer would not exercise its discretion against him by declining to pay the bonus.
Schaefer Elevator claimed that it did not have an obligation to pay the bonus since the terms of the bonus plan were expressly set out in the employment contract. Schaefer Elevator further argued that because the employee had not fulfilled the preconditions set out in the employment contract for receipt of the bonus, he did not have a contractual entitlement to the bonus.
Even though the written preconditions of the bonus plan were not fulfilled, the Court still considered the above-noted factors in determining if the employee was entitled to the bonus, and found that he was in this case. Importantly, the Court found that due to Schaefer Elevator's past conduct in paying out bonuses where the preconditions under the contract were not met, the employee had a reasonable expectation as to the manner in which his employer would exercise its discretion under the contract to pay the bonus. He was awarded $20,000 for his bonus for last year of his employment contract. Interestingly, however, he was not awarded a bonus for the notice period. The court found that his employment had been terminated in accordance with his contract, and as such, he was not wrongfully deprived of an opportunity to earn an annual bonus.
Even where the terms of a bonus plan expressly state that payment of a bonus is discretionary, an employer's conduct can affect whether the bonus is treated as discretionary upon termination of employment. Employers should be aware of, and adhere to, the terms of the bonus plan. Importantly, employers should be mindful of the pattern and history of discretion exercised in awarding bonuses during an employee's employment.
Note: This a reprint of an article by J. Alexandra MacCarthy of Fasken.