ENSURING A DISCRETIONARY BONUS REMAINS DISCRETIONARY

Many compensation plans include entitlement to some form of variable pay or bonus, and typically with respect to a bonus the employer will take the position that it is discretionary, that is that they get to decide who gets the bonus, when they get it and how much they get. Some bonus plans are structured further to have defined pre conditions to receipt of the bonus. Maintaining the discretionary character of the bonus is particularly important at a time when an employee is being terminated. If the bonus is truly discretionary the employer will not be liable to provide compensation for the bonus during the period of notice. If it is not, the employer will be liable.

A recent British Columbia Supreme Court decision, Thoma v. Schaefer Elevator Components Inc (2019 BCSC 100) demonstrates how an employer can lose the protection of a discretionary bonus and become liable for payment of the bonus during the period of notice. Thoma involved a without cause termination. Schaefer had a written bonus plan which provided that numerous pre conditions had to be fulfilled before the bonus would be payable. The terms of the plan included that the bonus was payable based upon agreed upon targets and the employees degree of achievement of those targets. Mr. Thoma argued that the bonus should be included as part of his compensation during the period of notice, arguing that it was an integral part of his compensation and that based on the employer’s past conduct in paying out bonuses when the preconditions were not fulfilled, he had a reasonable expectation that the employer would pay out the bonus, despite their discretion to decline to pay in the circumstances. Schaefer argued that they were not required to pay the bonus because the terms of the plan were expressly set out and the preconditions had not been fulfilled, therefore Mr. Thoma was not contractually entitled to it. The Court agreed with Mr. Thoma finding that Schaefer’s past conduct in paying out the bonus despite the pre conditions not being fulfilled led to a reasonable expectation of how the employer would exercise its discretion. The Court used this rationale to award Mr. Thoma the bonus during his last year of employment, but not during the notice period on the basis that the notice period and entitlement to damages during the notice period was contractually specified.

Although this decision did not ultimately award the discretionary bonus during the period of notice, it did demonstrate the Court’s willingness to pass judgment on whether a discretionary notice must be paid despite an employer’s exercise of discretion otherwise. The factors the court will look to in making that determination include whether:

• the employee received a bonus each year;
• the employer ever exercised its discretion to not award a bonus despite failure to achieve set pre conditions; and
• the bonus constituted a significant component of the employee’s overall compensation.

The take away message for employers is if you want to insulate yourself from a court interfering with your discretion to award a bonus, in particular in situations where defined pre conditions are not met, it is important that you are not awarding the bonus despite the failure to achieve the pre conditions. In considering whether you are liable to pay the bonus with respect to a terminated employee consideration of how the bonus has been historically treated will be paramount.

Questions?  Comments?  Please contact Rose Keith at [email protected] or anyone else from our team listed on the Authors page.

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