Bonus Pay

Who Doesn’t Love Bonus Pay?

Bonus pay usually operates as a win-win in most employment relationships.  Astute employers use it to incentivize, offering employees a tangible reward for going over and beyond their job requirements. However, bonus pay can become a lightning rod for conflict when business conditions change.

Why Employers Deny Bonus Pay

Some employers withhold bonus pay to save money. A good case in point is Ontario’s recent overhaul in employment standards. Bill 148 has caused a sudden rise in the minimum wage with higher payroll costs. Arguments on the impact of these changes on the economy have been made on both sides. The Bank of Canada has estimated a projected loss of 60,000 jobs while others predict a boost to the economy with more people having access to disposable income.

The actual outcome remains to be seen yet the uncertainty has triggered some employers to examine the bottom line closely for cost savings. With the perceived need to curb costs, bonus pay can shine out as the low-hanging fruit. Some employers could eliminate it together. If the amount is large enough, your employer might even announce retroactive elimination of bonus pay before it becomes payable to you.

Such unilateral actions can leave employees feeling short-changed. Can your employer do this? How reasonably can you rely on bonus pay “promises” made to you?

Current Status of Bonus Pay Case Law

Canadian laws generally favour employees’ non-discretionary bonus pay which is based on a predetermined objective or calculation. Throughout your employment, the law upholds your contractual right to this type of bonus pay.

When your employer fails to pay out a predetermined bonus, the courts will establish whether they have breached your contract and substantially altered the terms of your agreement. The latter constitute grounds for constructive dismissal.

Under normal circumstances, if you resign from your post, you are ineligible for termination pay. However, constructive dismissal cases substantially alter that outcome. It puts your employer back on the hook for termination pay and any other contractual promises they made to you, including bonus pay.

Bonus Pay Withheld during Employment

Is this a Breach of Contract or a Constructive Dismissal? In the case of Chapman v. GPM Investment, Mr. Chapman was CEO of GPM Investment Management for 9 years. As part of his remuneration, he was eligible for a bonus pay of 10% of the company’s pre-tax profits. In 2011, his employer informed him that the calculation of profits would not include proceeds from a one-time real estate sale. And with it, they withheld a bonus payment of approximately $300,000.

Mr. Chapman quit his job and proceeded with a constructive dismissal claim. While the court recognized a fundamental breach of his employment agreement, they suggested the dispute arose over the interpretation of the bonus calculation and not a change of the contract. Consequently, the grounds for a constructive dismissal were weak. The court did not award him severance pay because he quit his position. But he was still awarded damages for breach of contract limited to his withheld bonus pay.

Bonus Pay and Constructive Dismissal

In a contrasting case, Prion v. Dominion Masonry, Mr. Prion was a foreman with Dominion Masonry for 19 years. When his employer unilaterally halted his pre-agreed bonus payment, he quit and claimed constructive dismissal. He had relied on this bonus for several years and it formed a substantial portion of his remuneration.

His employer did not dispute the facts. Rather, they cited tough economic times as their bonafide reason for withholding the bonus. The court sided with Mr. Prion stating his compensation had been substantially altered. This employer had breached a fundamental term of his contract. This satisfied the requirements for constructive dismissal.

Bonus Pay – Active Employment Clause

When employees are terminated, they are entitled to reasonable notice based on several factors. Employers must include the total remuneration the employee expected to receive in the calculation and not just the base pay.

This was illustrated in the case of Paquette v. TeraGo Networks Inc. The court dealt with a type of dispute common with bonus pay. The situation involved a contractual requirement for employees to be “actively employed on the date of the bonus payout”.

Trevor Paquette had been a Lead Systems Architect for 14 years until he was terminated from his employment. At trial, he was granted 17 months of termination pay. They unfortunately excluded the bonus pay from his award. Following an appeal, the court disregarded the “active employment” provision in the agreement because the bonus pay would have been effective, but for the termination.

Bonus Pay denied with Severance

Around the same time, the courts heard another similar case, Lin v. Ontario Teachers’ Pension Plan. Here, Mr. Lin was an investment professional eligible for two types of bonus pay from his employer. When they terminated his employment after 8 years, his employer refused to pay the bonus, citing the “active employment” clause in his contract. The court rendered this provision unenforceable.

Consequently, these two decisions now constitute the general legal standard for bonus pay entitlement in such situations.

When Courts Agree with Employers

While courts generally side with employees, there are exceptions.  The case of Kielb v. National Monetary Mart Company clearly demonstrated this.

Mr. Kielb, a lawyer, was employed for 18 months when his employer terminated him. His employment contract included a discretionary bonus pay. It expressly stated the bonus pay would not accrue over time. It also included specific examples of when the payout could occur. Not surprisingly, Mr. Kielb felt entitled to the bonus payments as part of his severance package.

To resolve this, the court examined how the contract was drawn up. Mr. Kielb, a lawyer who was familiar with contract negotiations, had vetted the contract extensively. He was intimate with the terms limiting his bonus payout. Nevertheless, he had agreed to them. Additionally, there was no public policy reason to disregard the verbiage of the contract. The court ruled in favour of the employer.

Bonus Pay – Consulting with a Lawyer

If you are employed without a written agreement, the law will uphold your right to receive earned income through bonus pay. The law presumes, by default, that you are eligible for your determined bonus, leaving your employer to prove otherwise.

If you are commencing a new employment relationship and a bonus is part of your remuneration package, then it is always a good idea to get this contract reviewed by an employment lawyer before you sign it. This is especially important if your contract includes terms that limit the payout.  We can inject clarity and fairness into the process, ensuring you do not face the same uncertainty as employees described in the case law examples above.

Lecker & Associates is a team of Toronto employment lawyers with over 35 years of experience. We exclusively represent employees. Wrongful and Constructive Dismissal cases remain a cornerstone of our practice. If you enjoyed this blog please consider sharing it.