Discretionary And Non-Discretionary Bonuses For A Terminated Employee
The issue of whether a terminated employee is entitled to receive a discretionary performance-based bonus was addressed in a recent decision from the Ontario Superior Court of Justice, Singer v. Nordstrong Equipment Limited, 2017 ONSC 5906 (CanLII).
Normally in employment law, a terminated employee must be put in the same position during the reasonable notice period as they would have been had they not been terminated. This implies that during the reasonable notice period, the employee is entitled to all the same benefits that they were afforded as part of their employment, including extended health and dental benefits, long term disability coverage, RRSP matching programs, and even non-discretionary bonuses.
However, if a bonus is discretionary and performance based, the question remains whether the employer is required to pay the bonus to a terminated employee for work completed in the last year of their employment.
It stands to reason that if an employee is terminated for performance based concerns, with or without cause, they should not be entitled to a discretionary performance based bonus. However, if the employee is terminated without cause, for reasons other than performance concerns, that employee should have some entitlement to the bonus that he/she would have otherwise been entitled had the termination not occurred.
The Singer v. Nordstrong Case
In the Singer case, the plaintiff was 53 years old and received an annual base salary of $180,000.00 per year. He also received (a) a matching 4% contribution to an RRSP, (b) an annual car allowance of $9,600.00 with fuel reimbursement and use of a highway transponder, (c) a paid cellular telephone; and (d) participation in the defendant’s extended health and dental plan. The plaintiff also received an annual bonus ranging from 3.870% – 6.020% on the pre-tax profits of the defendant resulting in an annual bonus of $56,000.00 – $120,000.00 per year. On termination, the defendant provided the plaintiff with 1 years’ notice, continuation of benefits but no bonus for the period worked immediately prior to the termination.
In determining reasonable notice, the court held, relying on Fisher v. Hirtz, 2016 ONSC 4768 (CanLII):
… the character of employment factor tends to justify longer notice periods for senior management employees or highly skilled and specialized employees and a shorter period for lower ranked for unspecialised employees. Generally speaking, a longer notice period will be justified for older, long term employees, who may be at a competitive disadvantage in securing new employment because of their age.
Using this approach, the court held that the plaintiff was entitled to 17 months of notice, or $255,000.00 plus continuation of all other benefits.
The defendant argued that the plaintiff should not be entitled to a discretionary bonus for the period immediately preceding the termination. The plaintiff was terminated on December 12, 2016, approximately 2 weeks prior to the end of the defendant’s 2016 fiscal year. In determining whether or not the plaintiff was entitled to a bonus for the 2016 year, the court first attempted to determine whether the bonus was, in fact, discretionary or non-discretionary.
Unfortunately, the plaintiff did not have an employment agreement, so the court was required to look at corporate policies and procedure documents to make this factual determination. In a document titled, “Canerector Inc. Corporate Culture” the following excerpts addressed bonuses:
With delegation goes incentives; it is unrealistic to ask division managers to be entrepreneurial if they have no incentive to do so. In the 1980’s we developed a bonus or profit sharing plan which has not changed since.
We emphasize profit, and thus the incentive plan is not tied to any indicator except profit. These bonuses are paid in January or early February after the yearly financial results are finalized. The bonus pool is 15% of the division’s yearly pre-tax profit net of head office fees and putative loan interest.
The bonus pool for each division is calculated using this formula, and there is no discretion involved.
How is the bonus distributed? The division manager prepares a list and discusses it with Corporate Office. We give each division manager wide latitude in allocating bonuses. The division manager receives the largest bonus, which usually amounts to a third of the bonus pool in a big business and perhaps as much as half in a small one. The division managers are acutely conscious that their success depends on their colleagues, and they tend to want to spread the bonus around as much as possible.
Eligible for a Bonus Versus Entitled
Based on this, the plaintiff argued that he was entitled to a fixed, non-discretionary bonus of 5% of the pre-tax profits of the defendant for 2016. The defendant argued that the plaintiff was only “eligible” but not “entitled” to receive an annual bonus..
However, the court held that the language used in the defendant’s policies and procedures reflected that the bonus was not discretionary at all and the respective divisions of the business were entitled to a 15% bonus calculated on the defendant’s profits automatically for each fiscal year. What was discretionary was the value of the bonus allocated to each individual in each division. Accordingly, the court held that the plaintiff was entitled to his annual bonus for the 2016 fiscal year at an amount equal to the average percentage of the defendant’s profits for the last 5 year period, or 5.08% of the defendant’s 2016 profits.
This decision is valuable to employers because it demonstrates that absent an employment agreement, the court is open to interpret the facts based on any relevant document, including corporate policies and procedures. Had an employment agreement been in place that explicitly outlined that the bonus was discretionary, it is likely that the plaintiff would not have been entitled to a performance-based bonus for work completed prior to termination. Additionally, the case demonstrates the principle that highly skilled or managerial employees are entitled to higher reasonable notice than lower level or unskilled employees. Determination of reasonable notice is an art, not a scientific calculation. What is reasonable for employee A may not be reasonable for employee B.
While even discretionary bonuses cannot be arbitrarily administered by an employer, the case provides a valuable lesson for employers in determining what payments are required to be paid to a terminated employee. If an employee would have been entitled to a bonus had the employee not been terminated, then the employer is required to include the bonus in the reasonable notice provided.
Scott Chambers is an Employment and Human Resources Lawyer at Doak Shirreff Lawyers LLP.