Are Employees Always Entitled to Bonus Pay in Ontario?

Bonus pay is a common component of many employment compensation packages, but an employee’s right or entitlement to it can be complex and dependent on various factors. This blog will delve into the nature of bonus pay, its significance in employment contracts, and the circumstances under which an employer may refuse to provide it to an employee, especially upon termination of employment.

What is Bonus Pay?

Bonus pay is a form of additional compensation that is not considered part of an employee’s regular annual income, in addition to base salary, health benefits, and pension plan contributions. It can be based on various factors, including:

Performance: Individual or team performance may be evaluated to determine bonus eligibility and amount.
Company performance: The overall success of the company can influence bonus payouts (including annual revenue or profit).
Length of service: Employees with longer tenures may be eligible for larger bonuses, which is especially important for new employees just joining a company (who may not be eligible based on time worked, or who would only be eligible to receive bonus pay on a pro-rated basis).
Achievement of specific goals: Meeting predetermined targets or objectives can trigger bonus payments.

Bonus plans can be formal or informal, and the specific terms and conditions will vary depending on the employer and the nature of the bonus. Most importantly, the courts in Ontario have held that even where an employer deems a bonus “discretionary,” they must always exercise their discretion when awarding bonus in a fair and reasonable manner.

The main reasons employers have bonus pay include:

Motivation: Bonuses can incentivize employees to perform at their best and achieve company goals.
Retention: Attractive bonus plans can help retain top talent.
Recognition: Bonuses can be used to recognize outstanding performance and contributions.
Alignment of interests: Bonuses can align the interests of employees with those of the company.

The Significance of Bonus Plans

Many companies who offer their employees with bonus pay have well-structured bonus plans (or agreements), which can serve several purposes, including providing clarification on the terms and conditions of bonus pay. Among other things, well drafted bonus plans will include sections that discuss an employee’s right to receive bonus pay, as well as an employer’s rights on how to calculate bonus pay or even provide them if certain conditions are met, including if there is a termination of employment or if the employee resigns from their job.

An Employee’s Entitlement to Bonus Pay When They Resign

Whether an employee is entitled to a bonus upon resignation depends on the specific terms of the bonus plan and the employment contract. If the bonus is discretionary, the employer may have the discretion to withhold or reduce the bonus, especially if the employee decides to voluntarily resign from their job (quit). However, if the bonus is earned based on performance or other objective criteria, and the employment contract specifically requires employers to still provide bonus to the employee even if there is a resignation, the employer may have to include it in the employee’s final pay.

An Employee’s Entitlement to Bonus Pay When They Are Terminated

An employee’s entitlement to bonus pay upon termination depends on the reason for termination and the terms of the bonus plan.

(a) Termination for Just Cause

If an employee is terminated for just cause (including for wrongful misconduct) they are generally not entitled to any severance pay, including bonuses that have not yet been earned. This is because just cause termination typically indicates a serious breach of contract that negates any entitlement to additional compensation, which is permitted by the Ontario Employment Standards Act, 2000.

(b) Termination Without Just Cause

If an employee is terminated without just cause, they may be entitled to bonuses that were earned or would have been earned if they had continued in their employment. This would be included in an employee’s severance package upon termination. However, the specific terms of the bonus plan will determine the employee’s entitlement.

How Bonus Pay is Accounted for in an Employee’s Severance Package

When an employee is terminated without just cause, bonus pay may be included in their severance package. However, the specific treatment of bonus pay in severance calculations can vary depending on the terms of the employment contract and the bonus plan, including when it comes to specific formula taking into account a company’s annual revenues or profits, as well as whether or not the company and employee met specific performance targets.

In some cases upon termination of employment, the bonus may be prorated based on the employee’s length of service during the bonus period. In other cases, the bonus may be paid in full if the employee has met the necessary performance criteria.

The Significance of a Forfeiture Clause

A forfeiture clause in an employment contract or bonus plan can limit or eliminate an employee’s entitlement to bonus pay upon termination. These clauses may stipulate that bonuses are forfeited if the employee breaches the contract, is terminated for just cause, or leaves the company before a specified date.

It is important for employees to carefully review any forfeiture clauses in their employment contracts or bonus plans to understand their potential impact before signing them, since it will impact their future rights and entitlements when it comes to severance packages upon termination.

Conclusion

An employee’s entitlement to bonus pay is a complex issue that depends on various factors, including the terms of the employment contract, the bonus plan, and the reason for termination. Employees and employers should carefully review and understand the provisions related to bonus pay in their employment relationships to avoid misunderstandings and disputes.

Book a Consultation with an Employment Lawyer in Toronto

At Bune Law, we understand and are familiar the complexities of workplace law and are committed to helping both employers and employees navigate these challenges. Whether you are an employer or employee dealing with employment contracts, workplace disputes like a wrongful dismissal or constructive dismissal, or simply need guidance on your rights and obligations for a severance package review and negotiation, our experienced employment lawyer is here to assist you.

Book a confidential consultation with our Toronto employment law firm to protect your legal rights to understand your options and protect your rights.

Why Choose Bune Law When You Need an Ontario Employment Lawyer?

Experience in all areas of workplace law, including wrongful dismissal claims, constructive dismissal claims, severance package reviews, severance package negotiations, discrimination and human rights disputes, and employment contract reviews.
Proven track record of successfully resolving workplace disputes through negotiation, mediation, and employment litigation.
Compassionate and personalized approach to each case, ensuring tailored solutions that meet your specific needs.

If you need a Toronto employment lawyer who is committed to delivering strong results and proactive solutions, please contact Bune Law online or by phone today at 647-822-5492.