Employer Obligations When Issuing Discretionary Bonuses

It is quite common for employers to offer a bonus or incentive payment as part of a worker’s compensation. Bonuses serve a useful dual function – incentivizing individuals to perform their duties well and then rewarding achievement of the same.

Contractual bonus rights come in a variety of shapes and sizes. Some operate based on fixed or formulaic entitlements, while others purport to be receivable at the employer’s sole discretion.

Disputes over bonus payments can materialize where an employee believes a payment should have been made or where what is received is less than expected. Such disputes are less likely to occur where a clear formula dictates the circumstances in which a particular amount will be due and owing. That said, some employers nonetheless prefer to make bonus payments discretionary so that they (at least in theory) retain greater flexibility around what is paid.

Guidance from the Court of Appeal

Recently, Ontario’s top court provided clear guidance with respect to how employers must act when considering if (and when) a discretionary bonus may be owing. In Bowen v. JC Clark Ltd., the Court of Appeal for Ontario considered the following discretionary bonus language in the context of a breach of contract claim:

At the total discretion of the Company, you may be eligible for a bonus at the end of each fiscal year depending on factors that include your personal performance and the profitability of the Company.

In reviewing the Bowen decision, the Court of Appeal rejected the respondent employer’s position that the plaintiffs had no contractual entitlement to a discretionary bonus payment for the period in question. In reaching this conclusion, the Court stated that it “did not accept the respondent’s position that the discretionary nature of the bonus provision…in the employment agreements means that the employer was entirely unconstrained as to how that discretion was exercised.”

Rather, where an employment agreement provides for a discretionary bonus, “there is an implied term that the discretion will be exercised in a fair and reasonable manner.”

In this context, the Court considered whether the employer’s decision to withhold a bonus payment reflected a fair and reasonable exercise of its discretion. The employer led evidence at trial that it assessed bonus entitlement every December, considering factors such as corporate performance, individual performance, attitude, teamwork, and tenure. The plaintiff employees had argued in response that similarly situated staff, who performed at a lower level, nonetheless received a bonus of $200,000.00 for the applicable time period.

The Court of Appeal accepted the plaintiffs’ assertion to conclude that the respondent employer had assessed bonus entitlement in a “purely subjective” manner which was “inconsistent with the obligation to exercise that discretion in a fair and reasonable manner.”

The Court then awarded the plaintiffs damages in lieu of the discretionary bonus payment. To reflect a “fair and reasonable” exercise of discretion, each plaintiff received a pro-rated payment of $115,000.00 (based on the $200,000.00 received by similarly situated employees).

Takeaways for Employers and Employees

Ontario employers that choose to offer discretionary bonuses do not have an unfettered right to exercise their discretion as and how they please. Rather, the employer must be able to show that its discretion is exercised in a fair and reasonable manner. Subjective assessments, which result in similarly-situated employees being treated unequally, may fail under scrutiny.

As such, to meet this requirement, employers should ensure they have a transparent and defensible process that informs decisions around bonus payments (documenting the same). This process should address the objective factors considered, who receives payments, when they are issued, and the amount (particularly if an employer opts to pay varying amounts to staff in similar positions).

It is also worthwhile for employers offering discretionary bonuses to revisit their employment agreements. The language therein should be reviewed to ensure it adheres to the standard imposed by the common law.

Employees, on the other hand, should be aware they have a right to be treated fairly. Simply because a bonus has been described as “discretionary”, their employer cannot arbitrarily withhold or deny a payment which may reasonably be considered owing. This may be a concern during employment or in the context of a claim for damages in a wrongful dismissal action.

Employees who are dissatisfied with their receipt of a discretionary bonus (or lack thereof) may consider asking that their employer explain how its decision was made, and what factors informed its exercise of discretion. Where the response appears subjective, or unfair, employees may have a contractual right to nonetheless seek payment. Such situations should be navigated carefully with the assistance of legal counsel.

Vey Willetts LLP is an Ottawa-based employment and labour law boutique that provides timely and cost-effective legal advice to help employees and employers resolve workplace issues in the National Capital Region and across Ontario. To speak with an employment lawyer, contact us at: 613-238-4430 or info@vwlawyers.ca