Canadian Lawyer InHouse

Workplace Solutions By Malcom MacKillop and Hendrik Nieuwland The bonus round 'Wages' don't include bonuses dependent on discretion of employer. I Malcolm MacKillop and Hendrik Nieuwland practise employment law with the firm Shields O'Donnell MacKillop LLP of Toronto. t's that time of year again — bonus season. It's an excellent opportunity for employers to show their appreciation to employees for their service over the past year, and to motivate them for the upcoming year. However, bonuses can create headaches for employers, especially when exiting an employee who earned large bonuses. Is a terminated employee entitled to receive a big bonus on their way out the door? The answer is sometimes "yes," but this can be avoided by well-crafted bonus language in a policy or employment contract. We all know an employee who is terminated without cause is entitled to reasonable notice of dismissal, or pay in lieu thereof. Whether bonuses should be included in payments over the reasonable notice period is almost always disputed, which can lead to expensive litigation. Purely discretionary bonuses are difficult to recover in a court action. This is because "wages" under Ontario's 2000 Employment Standards Act does not include bonuses that are dependent on the discretion of the employer and not related to hours, production, or efficiency. Therefore, where an employer has a statutory obligation to pay an employee "wages" in lieu of notice, purely discretionary bonuses are not included. That being said, a consistent pattern of paying so-called "discretionary" bonuses opens the door to argue the bonus is an "integral part" of compensation, and is actually not discretionary in practice. In that case the bonus payment cannot be excluded from payments made to employees during the notice period. Yet bonus entitlements, like any other entitlement in an employment relationship, can be restricted by contract so long as the contract does not provide an employee with less than the statutory minimums required on termination (see Machtinger v. HOJ Industries Ltd.). The courts have had ample opportunity to interpret contractual provisions addressing bonus entitlement on termination. Many provisions state an employee must be "actively employed" at a particular time in order to receive the bonus. For example, an employer declares a discretionary bonus will be paid on Jan. 1, to those who are "actively employed" as required by the bonus policy. The employer then decides it wants to head in a different direction in the new year, and terminates its top longservice executives in the fall of 2013 without notice. According to the courts, most recently in Bernier v. Nygard International Partnership, in such a circumstance the employer is still obligated to pay the executives the bonus. The courts have reasoned using "active employment" as an eligibility criterion is not clear enough language to exclude the reasonable notice period. In other words, the courts consider the executives to be "actively employed" during the notice period (at least for the purposes of the bonus policy), and since the bonus is paid to other employees during the notice period, the dismissed executives are entitled to receive it. As this example shows, unclear language can cost an employer tens (and sometimes hundreds) of thousands of dollars. Employers should therefore ensure the following language is included in any bonus policy or employment contract: 1. Sole and absolute discretion: The language should state the awarding of any bonus is at the "sole and absolute discretion" of the employer. Language like this can help counter the argument that a bonus is "wages" under employment standards legislation or is an integral part of the employee's compensation package. 2. Bonus is not guaranteed: Employers should also expressly state the award of a bonus in one year does not in any way guarantee a bonus will be awarded in any subsequent year. This language will assist employers in asserting employees could not have had a reasonable expectation to receive a bonus over a future notice period. 3. Active employment does not include the notice period: As indicated above, using language that requires employees to be be "actively employed" on a particular vesting date in order to receive a bonus is not going to be sufficient to exclude entitlement to a bonus over the reasonable notice period. Employers must make it clear "active employment" does not include any period of time where the employee ceases to provide services to the employer, irrespective of whether he or she is entitled to receive any payments from the employer. For greater certainty, the employer will want to make it explicit that "active employment" does not include any period of notice under both statute and the common law. IH canadianlawyermag.com/inhouse February 2014 13

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