Bonus entitlement is always a juicy topic. In September the Ontario Superior Court of Justice released a decision that shed some light on the issue of how entitlement to a bonus will be treated where an employer has no formal bonus policy, but a consistent past practice.
In Fulmer v. Nordstrong Equipment Limited, a wrongful dismissal case, the former employee (“Fulmer”) had received a discretionary bonus in each of his six years with the employer. The employer attempted to argue that their “unofficial” bonus policy was that terminated employees would not be provided with any bonus pro rata or otherwise. In this case there was no employment contract, and the termination letter was silent on both entitlement to a bonus and any performance issues.
The employer argued post-termination that they discovered issues related to Fulmer’s performance, which would have disentitled him to his 2016 bonus, a period during which Fulmer was still actively at work. The judge dismissed this argument, commenting that the employer was simply seeking reasons for which to disentitle the plaintiff from his bonus.
The judge looked at the employer’s 2016 profitability and awarded Fulmer a $20,000.00 bonus for 2016. While Fulmer argued that he was also entitled to his 2017 bonus during the ten month notice period falling in 2017, the judge determined that because bonuses were calculated at the end of the year, and based on the employee’s positive contributions to the company throughout that year, it was not reasonable to expect a bonus for 2017. Justice Diamon made the following comments, emphasising the plaintiff’s duty to mitigate during the notice period: “I do not find it to be within the reasonable expectation of the plaintiff (charged with a duty to mitigate his losses) to be able to earn a bonus for the 2017 calendar year while he searched for alternative, comparable employment.”
Courts will look to what is fair and reasonable in determining entitlement to bonuses. Simply because a bonus is “discretionary” does not mean that it can be awarded in an unfair or arbitrary way. Courts will look for a bonus process, even in the absence of an official policy.
Where an employer attempts to justify an “unofficial policy” in a way that is not fair, a negative inference is likely to be made as against the employer.
This case serves as a reminder of the importance of the following:
- Having a bonus policy that is in writing and including details regarding how bonuses will be calculated and awarded;
- Following a formal bonus procedure and doing so uniformly;
- Making employees aware of their bonus entitlements and eligibility; and
- Addressing the question of bonuses in the employment agreement, including treatment of the bonus on termination.
As in this case, courts will look to past practice, and what is fair and reasonable, to determine the quantum of a bonus where there is no official policy.