Court Denies Entitlement to Discretionary Bonus on Termination

8 mars 2017 | Nafisah Chowdhury

( Disponible en anglais seulement )

With all of the recent attention surrounding Paquette v. TeraGo Networks Inc., Lin v. Ontario Teachers’ Pension Plan, and Styles v. Alberta Investment Management Corporation, it is clear that the issue of bonus entitlements on termination is a hot topic.

Another bonus-related case that warrants closer attention is Fraser v. Canerector Inc., 2016 ONSC 6071, a decision of the Ontario Divisional Court dealing with discretionary bonuses.

In Fraser, the plaintiff employee sued his former employer for wrongful dismissal, seeking, among other things, damages for a lost bonus. In asserting his entitlement, the employee relied on an offer letter that stated, “you will also be eligible to participate in our employee bonus plan.” He also relied on the fact that he had received substantial bonus payments during each of his years of employment. The plaintiff worked from August 2011 to June 2014.  During this time, he earned the following bonus payments:

  • 2011:   $50,000.00
  • 2012:   $75,000.00
  • 2013:   $175,000.00

In Fraser, it was an uncontroverted fact that bonuses at the company were discretionary and followed no fixed formula. Notwithstanding the employee’s knowledge in this regard, he argued that his bonus was an integral part of his compensation structure and that he was accordingly entitled to the payment of same during his reasonable notice period.

A summary judgment motion was heard. At the motion, the Court found that the employee was entitled to a 4.5 month notice period, but denied his claim for a bonus.

The employee appealed to the Ontario Divisional Court, which appeal was dismissed.  In arriving at its decision, the Divisional Court made the following observations:

[30]      …the motion judge noted that the appellant was urging the court to accept that the bonus plan was an integral part of his remuneration, “a factor that he seeks to elevate to the level of entitlement”. The motion judge went on to explain…his rejection of the appellant’s position:

In this regard, the plaintiff is conflating “eligibility” with “entitlement”. The plaintiff’s contract stipulated that he would be “eligible” to participate in the bonus program.  His entitlements under that program, however, were at all times discretionary until fixed and declared. For this reason as well, I find that he had no entitlement to any amount of bonus at the time of the termination of his employment or at the end of the notice period I have found he was entitled to.

[31]      The facts that the motion judge accepted provided ample support for this position. The offer of employment gave the appellant the right to participate in the bonus plan. He was not contractually entitled to a bonus. The offer of employment only gave the appellant the right to participate in the bonus plan. There was no guarantee that the appellant would receive a bonus every year. The bonus plan was “by its nature discretionary and thus subjective.” Bonuses were “highly variable” and could be nil…

The Fraser case serves as a good reminder that an employee’s eligibility to participate in a discretionary bonus program, and his or her ability to demonstrate annual payments under the program does not provide the employee with an automatic entitlement to bonus payments on termination.

To avoid any uncertainty in this area, employers who maintain discretionary bonus programs are advised to include bonus plan/contract language that makes it clear that annual bonus payments are entirely discretionary and may be nil if the company so decides. They should also track annual bonus payments so that, if the discretionary nature of their plans are ever challenged, they can point to actual evidence demonstrating their variable nature.

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