Discretion

A clause which allows the employer the right to use its discretion to determine whether and how a bonus payment is to be made is likely to be interpreted as requiring the exercise of good faith by the employer, as discussed above in Greenberg.

Such was the decision of the Ontario Superior Court in Chann v RBC Dominion Securities in which Wilton-Siegel J, stated:

There is, therefore, no issue that an employee is entitled to negotiate the amount of his or her bonus. The Executive Committee retains the sole discretion to award the discretionary cash bonus. However, it is also clear, and I believe acknowledged by the defendant's counsel on behalf of his client, that this discretion must be exercised in a fair and reasonable manner. In other words, it is an implied term of the employment agreement between RBCDS and its investment banking professionals that this discretion will be exercised in a fair and reasonable manner. While issues of enforcement of this provision would, typically, be raised by employees only in the context of allegations of constructive dismissal or actual termination of employment, it is a provision which exists throughout the employment relationship.

Changing the Bonus Terms Mid-stream

The Ontario court considered an alleged contract term which required current employment at the time of the bonus award to be eligible. ¹ The term defining this requirement came into existence several years following the commencement of employment. The trial judge found this clause unenforceable as there was no evidence that the plaintiff had agreed to such a term or even that this provision was brought to his attention. The defence failed on this issue. This issue is reviewed in more detail here.

Amendments to the Manner of Calculation

Although the Court in Mathieson v Scotia Capital did agree that the employer had the right to amend the factors it used to determine the bonus calculation from year to year, such a  provision should be included in the agreement from day one. M.A Code J. stated:

The only part of Wilton-Siegel J.’s formulation of the law that causes me any hesitation is his suggestion that the employer should apply the relevant criteria “consistently … from year to year.”  Although Wilton-Siegel J. qualified this proposition with the words “as far as is practicable”, it seems to me that senior management are entitled to adjust the weight given to various factors from year to year. Incentive or performance pay is highly discretionary and a new CEO is entitled to place greater weight on certain criteria, based on his/her business judgment and based on changing market conditions, changing public policy and changing views amongst experts in the field as to how best to award this form of compensation. There should be no suggestion that this very flexible and often controversial form of income is somehow stuck in the same mold “from year to year.”  What is important in terms of fairness, is that the criteria each year are reasonable, that they are communicated to employees and that they are applied “consistently among employees” as Wilton-Siegel J. put it.

Much to the same theme is the note made in Bain that the bonus terms may be reasonably altered, provided that it is fair and consistent to similarly situated employees.

Right of Audit

At one time, a statute in Ontario, once known as the Master Servant Act, later revised to the Employers and Employees Act, denied the right of an employee to seek an audit of the employer’s calculation of the employee’s entitlement when the payment of bonus is defined as a percentage of profits. The Act was repealed in November of 2017. It may be possible for an employment agreement entered into before that date to still be in force. It is likely that a statute since repealed could be used to interpret the rights of the parties.

Retention Factor

The employer may wish, apart from having the agreement define severance entitlement, also set out the agreed intent of the parties that one purpose of the bonus is designed as a retention incentive. In this manner, the common law claim for notice will be adjusted downward to reflect the retention component. The agreement should reflect the proportionate sum of the bonus allocated to the retention factor.

The Ontario Court of Appeal came to this conclusion in Brock v Mathews Group  1991 34 C.C.E.L. 50 in overturning the trial judge on this aspect of the decision:

The only argument with respect to the awarding of bonuses which we find to some extent compelling is that, based on the unchallenged evidence of Matthews, a portion of the bonus constituted a reward for past services and a portion an incentive to future good performance. That being so, we are of the view that the bonus for the 1984 fiscal year would be payable to Brock based on his contractual right to it for past services and as an incentive for good performance during the notice period in 1985 -- the amount to be the same as paid to Cerny, namely, $50,000. With respect to the 1985 fiscal year up to November 8, we consider that it is appropriate to award that portion of the bonus which would be a reward for past services, but not that portion which would constitute an incentive for the period following the November 8, 1984 notice date when Brock would not, under any circumstances, be employed by the company. For want of any better guideline, we would award to Brock a bonus at the rate of $25,000 payable for that portion of 1985 up to November 8 – that representing fifty percent of the bonus paid to Cerny for the 1985 fiscal year -- resulting in a bonus of $21,370.

Vacation Pay Gross Up

As noted above, the bonus payment is likely subject to a vacation pay increment. The agreement may define the payment to be inclusive of vacation pay gross-up.

Bonus Year to Date

The agreement should be careful to note that a prorated bonus will not be allowed and that the employee is required to complete the relevant fiscal year to be entitled to the relevant bonus payment.

The Court of Appeal in Moore v Thomas Fuller Construction agreed with the trial judge’s award of a prorated bonus, even given the fact of the employee’s resignation. Had there been a foundation of a contract setting out the converse, this would have ruled the day. Speaking to the trial decision, the Court of Appeal stated:

He also found one of those essential terms to be that the profit-sharing plan was an integral part of Mr. Moore’s compensation package. That plan was completely non-discretionary. It provided each employee with a fixed percentage of the company’s net profits for the year regardless of the employee’s performance or contribution to those profits. Mr. Moore’s share was 10 percent annually.

[6]               Finally, the trial judge found that the company did not tell Mr. Moore that he would get no bonus if he left mid-year and that there was no practice to that effect sufficient to make that consequence clear to Mr. Moore.

…..             The trial judge correctly found that Mr. Moore’s contract of employment provided that his compensation for the year included as an integral component a guarantee of 10 percent of the company’s net profits for that year. In construing the contract to give Mr. Moore 7/12 of that for working the first seven months, the trial judge was simply giving business efficacy to the compensation provision. Mr. Moore was as entitled to this part of his compensation package as he was to 7/12 of his annual salary for working those seven months.  The company could have negotiated a different contract with Mr. Moore that, for example, made the payment of a bonus discretionary, or conditioned the bonus on service for a full year. As the company did not do so, we are of the view that the trial judge reached the correct result in the circumstances of this case.

Termination Clause

The rules on restrictions on the entitlement to an incentive payment which would have otherwise fallen due in the common law notice period are unique. This issue is reviewed here.