The 2 Most Common Questions about Bonus Programs

Many employers have some form of bonus program to motivate employees to elevate their performance for the benefit of both the employer and the employees. When thoughtfully constructed and clearly communicated, such programs can achieve that purpose; however, we regularly field questions and concerns from employers about the operation of their bonus plans.

Two of the most common issues are:

  • What is required to change the terms of an existing plan?
  • What entitlement does an employee have if he/she is terminated or resigns?

The underlying concept to keep in mind is that a bonus program is part of the employment contract, regardless of whether it has been referenced in an employment letter or written contract.

Terms and conditions – particularly those which limit entitlement – must be clear and must be properly communicated to employees. It is best if this communication happens prior to or at the time of hire, but at the very least, communication should happen when the program is rolled out or when the employee joins it.

When drafting a bonus program it is critical to think carefully about what behaviour is being incented and whether the criteria are causally connected to that purpose. Some employers find that bonus plans are paying out large amounts to employees regardless of effort, or that criteria that were relevant when the plan was first created no longer have that connection. Having an expert create or review a bonus plan is often money well spent.

What is required to change the terms of an existing plan?

Where a bonus forms a significant aspect of an employee’s remuneration, any detrimental change to the bonus plan will potentially create a constructive dismissal, which would allow affected employees to resign and\or sue the employer.

Changes to a plan can always be done on reasonable notice; however, the length of that notice will be driven by the common law notice requirement of the longest serving affected employees, which can be many months.

To avoid this result, the plan should clearly state that it is subject to change at the sole discretion of the employer. Employers should also regularly update their plans and communicate those updates, so that a practice of making unilateral changes to the plan is established as part of the employment contract over time.

What entitlement does an employee have if he/she is terminated or resigns?

The answer to this second question also lies in the terms of the plan and the employment contract, and sometimes in the practice of payment over the life of the employment relationship.

Recent cases in Alberta and Ontario – which are of general application to all provinces except Quebec – have confirmed that, where the plan clearly states that an employee must be currently employed to be eligible for the bonus, such terms will normally be upheld and the bonus is not recoverable by the former employee.

Even where the plan does require current employment, questions can exist about whether bonus entitlement would have arisen during a period of reasonable notice (in not-for-cause terminations or resignations) and therefore be payable. Again, well drafted plans can anticipate this situation and contain language confirming that a period of notice or payment in lieu does not count as active employment. Such terms have also been upheld by courts.

The specific terms of bonus plans, as well as the facts surrounding the employment relationship, are critical in answering questions about bonus entitlement. For advice regarding your particular bonus plan situation, please contact one of our labour & employment practice area members.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.