As employers struggle with finding and keeping top performing employees, bonuses have become an important part of the compensation package. A bonus can be used to entice an employee to accept employment, to drive an employee to hit certain targets, to reward a team for successfully completing a project, etc. While bonuses are an important tool for employers, as is discussed below, it is crucial to use bonuses strategically. By using bonuses strategically, you can avoid unintentionally expanding your employer obligations and can limit some of your employer obligations.
1) Consider Using Bonuses to Establish Enforceable Employment Agreements
An employment agreement is the most important document that an employer can have in place. The agreement can define and limit numerous employer obligations (e.g. overtime pay obligations) and can establish employee obligations (e.g. non-solicitation obligations). One of the most critical provisions in an employment agreement, is the termination provision. With an enforceable termination provision, an employee can be limited to their Employment Standards Act entitlements or a greater amount. Without such a provision, when dismissed, an employee will be entitled to both their statutory termination entitlements and their common law termination entitlements. With a proper termination provision in an enforceable employment agreement, an employee’s termination entitlements could be reduced from 24 months’ compensation to only 8 weeks.To have an enforceable employment agreement, new consideration has to be given to the employee. It is a basic tenant of contract law that you must give something, to get something. Normally, the consideration is an offer of new employment. But for current employees, you can have them sign off on an enforceable employment agreement by giving them a new, unexpected, and substantial bonus. As such, before paying out any substantial bonus, you should consider whether you can use this as a moment to establish an enforceable and very helpful employment agreement.
2) Be Sure to Avoid Bonuses Unintentionally Increasing Vacation Pay and Holiday Pay
For the most part, employees in Ontario are entitled to both vacation pay and holiday pay. These entitlements are based on the employee’s earned wages. For example, for most employees with over 5 years of service, they are annually statutorily entitled to vacation pay based on 6% of their earned wages.
When a bonus is awarded to an employee, if the bonus falls within the definition of wages, then the bonus will increase the employee’s vacation pay and holiday pay entitlements. To avoid unintentionally increasing vacation pay and holiday pay entitlements, a written bonus policy should confirm that the entitlement to the bonus is entirely discretionary. Where a bonus is discretionary, as opposed to automatically earned based on performance, then the bonus does not fall within the definition of wages and will not increase the employee’s vacation pay and holiday pay entitlements. As such, if your company will be paying out bonuses, you should consider whether these bonuses will increase other entitlements and whether you wish to avoid this outcome through a proper written bonus policy.
3) Be Sure to Limit Bonus Entitlements Post-Employment
When an employee is dismissed, the employee will normally be entitled to the inclusion of their historic bonuses in the calculation of their termination entitlements. For most employers, paying out more bonus money to a former employee, is incredibly undesirable. This point was hit home in the Supreme Court of Canada decision of Matthews v. Ocean Nutrition Canada Ltd., where the issue was a former employee’s entitlement to a bonus. A term of the employee’s compensation package was that he would earn a bonus if the company was sold. The employee was dismissed and several months later, the company was sold. The Supreme Court of Canada held that, as the sale occurred during the termination notice period and as there was no proper limiting bonus policy, the employee was entitled to the sale bonus – which was $1.1 million dollars.
How can you avoid paying out more bonus money to a former employee? A proper written bonus policy is an important first step. This policy should confirm what happens to employee’s bonus entitlements if their employment ceases, in a manner that complies with the Employment Standards Act. In addition, you should further confirm the point with a limiting termination provision in an enforceable employment agreement. Together, these documents can ensure that an employee is only entitled to a bonus post-employment, where required by the minimum entitlements under the Employment Standards Act.
For more information or for assistance with strategically awarding bonuses, please contact our firm.
