Discretionary bonuses

A discretionary bonus may not be discretionary on termination of employment. If a bonus becomes an integral part of an employee's compensation, they may be entitled to that bonus during a reasonable notice period. In making this determination, the courts will consider factors such as whether:

  • the employee received a bonus each year;
  • bonuses were historically awarded;
  • the employer ever exercised discretion against the employee; and
  • the bonus constituted a significant component of the employee's overall compensation.

Case overview

The British Columbia Supreme Court recently found that an employer's refusal to pay a discretionary bonus can lead to a finding that the employer breached the employee's contractual rights where, over the course of their employment, the employee receives the bonus in a way which leads them to believe that their employer's discretion to provide the bonus will continue to be exercised in their favour.

In Thoma v Schaefer Elevator Components Inc (2019 BCSC 100) the employee, BT, entered into a five-year fixed-term employment contract with Schaefer Elevator. In addition to his base salary, the employee was to receive an annual bonus of "up to" C$24,000 per year based on "agreed upon targets" and his "degree of achievement" of those targets. The employment contract provided that Schaefer Elevator had the right to terminate the contract on six months' notice and that in the event of termination, BT would be provided with "contractually agreed remuneration during the six-month notice period".

BT's employment was terminated in October 2017 and he was paid six months' base salary. He sought damages for breach of contract arising out of the termination of his employment. He argued that Schaefer Elevator had failed to provide him with the full amount of remuneration to which he was entitled under the contract in the final year of his employment, and during the six-month notice period. He claimed that the annual bonus formed an integral part of his compensation and, 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 not exercise its discretion against him by declining to pay the bonus.

Schaefer Elevator claimed that it was not obliged to pay the bonus since the terms of the bonus plan were expressly set out in the employment contract. Schaefer Elevator further argued that because BT had not fulfilled the preconditions set out in the employment contract for receipt of the bonus, he was not contractually entitled to it.

Even though the bonus plan's written preconditions were not fulfilled, the court still considered the abovementioned factors to determine whether the employee was entitled to the bonus and found that he was in this case. Importantly, the court found that due to Schaefer Elevator's past conduct in paying out bonuses where the preconditions under the contract were not met, BT had a reasonable expectation as to how his employer would exercise its discretion under the contract to pay the bonus. He was awarded C$20,000 for his bonus for the last year of his employment contract. Interestingly, however, he was not awarded a bonus for the notice period. The court found that his employment had been terminated in accordance with his contract and, as such, he was not wrongfully deprived of an opportunity to earn an annual bonus.

Takeaway for employers

Even where the terms of a bonus plan expressly state a bonus is discretionary, an employer's conduct can affect whether the bonus is treated as discretionary on termination of employment. Employers should be aware of, and adhere to, the terms of bonus plans. Further, employers must be mindful of the pattern and history of discretion exercised in awarding bonuses during an employee's employment.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.