Bonus Plans

Many employers use bonuses and incentive plans to motivate, reward, and/or retain employees. Often the money paid under these plans becomes an integral part of the employee’s compensation plan.

The $64 000 Question

For the purposes of this blog we will assume your organization offers employees a bonus or incentive payment as part of their compensation.

Although an employer is required to provide an employee with notice of termination it usually provides an employee with termination pay instead of this notice.

If so, is the employer required to compensate an employee for the bonus or incentive payments she would otherwise have received during the notice period?

General Rule                         

Subject to an enforceable employment contract stating otherwise, if an employee is terminated without cause, she is generally entitled to pay in lieu of notice of termination based on total compensation. Total compensation would include payment of any bonus that is integral to the employee’s compensation the employee ought to have earned during the notice period.

Exceptions to the General Rule

Some bonus or incentive plans provide that an employee must be actively employed at the time a bonus is paid out to be eligible to receive the money. Including this kind of language in an employment contract or a bonus plan can limit an organization’s liability to provide bonus payments to terminated employees.

A Recent case

However, a recent Ontario case states that contractual language which purports to limit an employee’s right to bonus pay will not always be enforced. When refusing to enforce such contractual language the judge quoted with approval from another case where the judge refused to enforce the following contractual language:

“recipients must be actively employed by the Bank at the time the award is paid to be eligible for payment”.

Lessons to be learned:

1.Where an employee is terminated without cause, she is generally entitled to the bonus income she would have earned during the notice period unless an employment contract or bonus plan states otherwise.

2. An employer can limit an employee’s right to receive bonus payments on termination in certain circumstances.

3. If an employer wishes to limit bonus payments at the time of termination then the issue should be raised at the time the employee is offered the bonus.  The purpose of the bonus is important. In this regard, in the case mentioned above, the judge stated: “It (i.e. the bonus) is structured to reward current performance, not as a retention incentive.  … Payment is not deferred to April for the purpose of retaining employees to April.’