Are Bonuses Really Just "Bonuses"? A Look At Whether Bonuses Are Payable Post-Termination
Wednesday, October 31, 2018 - Filed in: Courts
With the waves of layoffs and terminations this year, a question asked frequently by employers and employees alike is, "Are employees entitled to their share of bonuses for the time they worked prior to their termination?"
Many employees . . . have arrangements where bonuses (and other forms of incentive compensation, such as stock options and share units) form a significant part of their total compensation. A departing employee may be giving up a considerable sum if the termination of employment means forfeiting bonuses for the period he or she actively worked prior to the termination notice. It is a crucial question for all affected and, unfortunately, one that is consistently disputed between employers and employees.
The courts wrestle with the issue of enabling an employer to effectively exclude an employee from bonuses for the duties and services the employee performed prior to termination. A practice often in issue is that of an employer's timing the delivery of a termination notice right before the bonus payment date, to the detriment of the departing employee.
While there is no easy answer, there are common factors the courts consider in determining whether to award bonuses for work prior to the termination notice. These common factors include the terms of the contract, whether the bonus is integral to the employees' total compensation and whether the notice period includes the date when the employees would normally be paid their bonuses.
Many employees . . . have arrangements where bonuses (and other forms of incentive compensation, such as stock options and share units) form a significant part of their total compensation. A departing employee may be giving up a considerable sum if the termination of employment means forfeiting bonuses for the period he or she actively worked prior to the termination notice. It is a crucial question for all affected and, unfortunately, one that is consistently disputed between employers and employees.
The courts wrestle with the issue of enabling an employer to effectively exclude an employee from bonuses for the duties and services the employee performed prior to termination. A practice often in issue is that of an employer's timing the delivery of a termination notice right before the bonus payment date, to the detriment of the departing employee.
While there is no easy answer, there are common factors the courts consider in determining whether to award bonuses for work prior to the termination notice. These common factors include the terms of the contract, whether the bonus is integral to the employees' total compensation and whether the notice period includes the date when the employees would normally be paid their bonuses.
What are the Terms of the Employment Contract or Bonus Plan?
The first place courts will look to is any enforceable contract or specific plan documentation governing how bonus payments work, and importantly, whether there is an exclusionary term preventing the payment of bonuses. The precise wording of the terms and conditions in such contracts or plans is critical. Courts will interpret the wording to determine whether (a) the terms and conditions were intended to have the effect of excluding a departing employee from receiving bonuses they actively worked for, and if so, whether (b) the terms are unconscionable, or (c) the terms are contrary to public policy.
In two recent cases, Courts permitted exclusionary terms to apply to terminated employees. In Kielb v National Money Mart Co., 2015 ONSC 3790 ("Kielb"), the contract contained clear terms stating that the employee, Mr. Kielb, would not receive a bonus even if wrongfully terminated. Mr. Kielb agreed to these terms. As a result, the Court found the term to be an enforceable exclusionary term, in favour of the employer. It is important to note, though, that Kielb was a lawyer who actively negotiated the terms of the contract and was aware of the bonus exclusionary term and its consequences when signing the contract.
Similarly, in Jivraj v Strategic Maintenance Ltd., 2014 ABQB 463, an employee was denied a bonus because the contract stated bonuses would not be paid if the employment "ceases for any reason". At the time of his hiring, the employee indicated that he understood this term. The Court stated that only very clear contractual language could disentitle an employee from receiving a previously earned bonus, and found that the term in this case was just that kind of clear unequivocal language.
Without the employee's understanding of the exclusionary term which is written in clear unequivocal language, employers will have difficulty in excluding bonuses in the final payment to employees. In those circumstances, Courts will be more inclined to fall back to the general principle discussed in the decision of Schumacher v Toronto Dominion Bank, 147 DLR (4th) 128 (OC Gen Div). In that case, even though the contract stated that the employee, Mr. Schumacher, had to be an employee on the bonus payday to receive a bonus, the Court found that the contract lacked clarity and definition on what it meant to be an "employee". In the absence of such clarity, the Court concluded that Mr. Schumacher was an "employee" until the end of the termination notice period, and was therefore entitled to a bonus.
Is the Bonus Integral to the Compensation Package?
If there is no enforceable exclusionary contractual term, the next step is to determine whether the bonus forms an integral part of the employee's total compensation.
In Christie v Citifinancial Canada Ltd, 2015 ABQB 487 ("Christie"), the Court summarized the factors that are important in determining whether a bonus is "integral":
- First, the Court will look at the bonus payout history, namely, were bonuses consistently awarded? Was the employee promised a bonus as part of negotiations? Was there a reasonable expectation of consistent bonuses? If so, the employee's claim that bonus was integral will be stronger.
- Second, the Court will look at the percentage of the employees' compensation that is comprised by the bonus. As a general rule, the higher the percentage the more integral the bonus is, and thus, the stronger the employee's entitlement to a bonus.
- Third, if the bonus was calculated by a formula or in an objectively quantifiable manner (as opposed to being purely discretionary by the employer), Courts are more likely to award the bonus.
The Court will weigh these three factors in order to determine whether the bonus was discretionary; the more discretionary (and less objective) the bonus, the harder it will be for an employee to claim entitlement to it.
Looking at these factors in Christie, the Court found that the bonus was paid in every quarter except one, it was a significant percentage of the employee's income and it was paid based on a clearly defined formula. The employer was held responsible for payment of the bonus.
When is the Bonus Scheduled to Be Paid?
Courts will be more inclined to require employers pay bonuses if the bonus payment date falls within the employee's termination notice period, or if the termination occurs shortly before the payment date. If the employee would not have reached the bonus payment date within the termination notice period, courts will be less likely to award it.
Timing was a relevant factor in Kielb. There, the Court stated that the contractual notice period would not take Mr. Kielb to the qualification date for the bonus payment and was a factor in deciding against the bonus being payable to Mr. Kielb.
Concluding Thoughts
Courts will be slow to deny an employee's entitlement to a bonus for a period actively worked, except in case where there is a clear understanding otherwise or there is a clear written exclusionary clause. In the absence of an exclusion clause, employers and employees may ask themselves: Has the employee worked for the bonus? Does the bonus payment date fall within the notice period? Is the bonus a large percentage of the employee's compensation? Were bonuses consistently paid to the employee? Would it be unfair to exclude the bonus? Affirmative answers to these questions suggest a court would favour the employee's position.
For an exclusionary term to apply, employers should ensure that the term is written in clear and unequivocal language. One way of accomplishing this is to illustrate the applicability of the exclusion clause with examples and dates.
Note: This a reprint of an article by Tina K. Lee and Kyle Isherwood of Burnet, Duckworth & Palmer LLP.