Avoid the bonus blues – considerations to keep in mind this bonus season

For many workplaces, the lead up to the holiday season also means it bonus season. Annual bonuses are a tool utilized by many employers to reward strong employee performance, split the corporate earnings with their workforce, or otherwise boost morale. While bonus payments can have their perks for employers and employees alike, there can also be pitfalls. In this blog post, we go over some common issues that arise when the time comes to announce and pay out bonuses.

1. Can no or low bonus give rise to a constructive dismissal claim?

2022 has been hard year for many industries, with inflation rates rising and signs of an economic recession looming. As a result, many employees may find themselves receiving no bonus or less than they are used to. In particular, this may be the case if bonus is a direct function of corporate performance.

Disappointed employees may be wondering whether a sharp decline in their bonus can give rise to a constructive dismissal claim?

The short answer is it depends.

As we discussed in our previous blog post, What is a Constructive Dismissal?, a constructive dismissal occurs when an employer unilaterally changes a fundamental term of the employment relationship without the employee's consent and to the detriment of the employee. This can include a material reduction in compensation, which the employee has not agreed to.

When it comes to bonus entitlements, a lot will turn on the facts of the situation, as well as the language of any applicable employment agreement or bonus plan. For example, if an employee was guaranteed a minimum bonus, and it is not paid, they may be able to claim constructive dismissal. On the flipside, if an employee signed an employment agreement that expressly stated bonus was discretionary and subject to the company meeting certain performance targets, it may be more difficult to establish a failure to pay a bonus amounts to constructive dismissal.

2. Does bonus fall within the definition of "wages"?

Another important issue that can sometimes be overlooked is whether or not the bonus will fall within the definition of "wage" under Ontario's Employment Standards Act ("ESA"). The ESA defines wages to include "monetary remuneration payable by an employee under the terms of an employment contract, oral or written, express or implied" but specifically excludes "any sums paid as gifts or bonuses that are dependent on the discretion of the employer and that are not related to hours, production or efficiency".

The caselaw on the topic clarifies that bonus that are (a) non-discretionary, or (b) linked to hours, production or efficiency will be considered wages under the ESA. This can have important implications including:

• The bonus must be accounted for when determining the employee's entitlement to vacation pay, as entitlement to vacation pay under the ESA is based on wages;
• The employee's bonus should be included on a wage statement;
• On termination, if the employee is entitled to an outstanding bonus that has not yet been paid, it must be paid with all other outstanding wages, meaning no later than seven days after the employment end or the employee's next payroll;
• Bonus may impact the amount of statutory termination pay that is owed to the employee; and
• An employee may be able to bring a claim under the ESA if their employer fails to pay them their earned bonus, among other things.

Employers and employees alike would do well to seek advice on whether their bonuses may be classified as "wages" under the ESA, to better understand their rights and obligations when making these payments.

3. What happens with bonus if an employee is terminated?

An employee's entitlement to bonus, or lack thereof, following termination is often a very live issue. The starting point is that if the bonus has been earned and would be payable to the employee at termination or during their statutory termination notice period, they should get it.

More tricky, are bonuses that would be payable during the employee's longer, common law reasonable notice period. In that case a two-step analysis must be followed:

1. Would the employee have been entitled to the bonus as part of their compensation during the reasonable notice period?; and
2. If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?

For more information on this analysis, check out our previous blog post, Bonus Entitlements on Termination – the Decision in Matthews v. Ocean Nutrition Canada Ltd.

It is important to note, however, that in recent years the courts have closely scrutinized any employment contract or bonus plan language that purports to limit an employee's entitlements on termination, including with respect to bonus. For example, in the recent Court of Appeal case of Nader v. University Health Network, 2022 ONCA 856, the Court found that a provision that stated the employee would be entitled to "an amount equal to 12 months salary" on a termination without cause should be interpreted as entitling the employee to his bonus during that period, not just base salary, as the bonus was a substantial and integral part of his compensation.

For employers, this means it is critical to closely review any contract or bonus plan language to ensure it appropriately limits liability for bonus following termination. On the flipside, employees may have greater entitlements to bonus following termination than it may appear at first glance.

Takeaways:

Bonuses can be an important tool, but a tool that should be used with care. In this blog post we highlight some issues employers and employees should be alert to when dealing with bonuses, but it is not exhaustive. In every case, we recommend speaking with an employment lawyer about your rights and obligations when it comes to bonus payments. Lee Workplace Law would be happy to help.