Legal requirements and best practices around bonus policies
As the year draws to a close, the topic of employee bonuses often comes to the forefront in many workplaces across Canada. Understanding the legal landscape surrounding bonuses is crucial for both employers and employees to ensure fair practice and compliance with the law. This article will explore the key considerations and best practices related to employee bonuses.
Most typically, bonuses can be categorized into two main types: discretionary and non-discretionary.
The foundation of any bonus arrangement lies in the employment contract. If a bonus is to be discretionary; say that. If non-discretionary, then employers should clearly outline the terms and conditions related to the bonus, including how it is assessed and calculated, when it is paid, and under what circumstances it might be withheld. This clarity helps prevent disputes and ensures that both parties have a mutual understanding.
For employees, it is important to thoroughly review and understand the bonus provisions in their contracts. Any ambiguities should be clarified with the employer to avoid misunderstandings at the time of payout.
Non-discretionary bonuses are often tied to performance metrics or targets. Employers must ensure that these metrics are realistic, measurable, and communicated clearly to employees. Performance reviews and feedback sessions should be conducted regularly to keep employees informed about their progress towards these targets.
Employers should also be cautious about changing performance metrics or targets mid-year, as this could lead to claims of unfairness or breach of contract. Any changes should be communicated clearly and, ideally, mutually agreed upon and with adequate notice of any changes.
In British Columbia, while the Employment Standards Act (ESA) does not specifically regulate bonuses, they can be considered part of an employee's wages under certain conditions. For example, if a bonus is guaranteed or regularly paid, it might be deemed an integral part of the employee’s compensation package. Therefore, employers should be mindful of how bonuses are represented in employment contracts and communications.
One common issue that arises is whether bonuses should be included in a termination notice period. If a bonus is deemed to be an expected component of the employee’s compensation, then it fits within the definition of “wages” under the BC ESA and other provincial employment standards legislation, and is required to be paid over the notice period.
At common law, it is possible for employers to clearly stipulate by contract that employees are not entitled to a bonus as part of their severance entitlements. However, if they fail to clearly and validly do this and the employee would have received a bonus over the notice period if not for the dismissal, then it is likely an entitlement (see, for example, Szczypiorkowski v. Coast Capital Savings Credit Union, 2011 BCSC 1376).
Therefore, employers should consider bonusing on dismissal. In cases where bonuses are a significant and integral component of an employee’s compensation, it likely needs to be factored into severance calculations unless there is clear and valid contractual language disentitling the employee. Otherwise, the situation is ripe for legal disputes or claims of wrongful dismissal.
Disagreements over bonuses are not uncommon and can arise from unclear contract terms, unmet performance expectations, or changes in company policy. To mitigate disputes, employers should maintain open lines of communication with employees and address concerns promptly.
For employees, if a promised bonus is not paid, it is advisable to first seek clarification from the employer. If the issue remains unresolved, legal recourse may be necessary.
To reduce the risk of disputes, some best practices for employers include:
Employee bonuses are a valuable tool for rewarding performance and incentivizing productivity. However, they require careful management to ensure legal compliance and maintain positive employer-employee relationships. By understanding the legal framework and implementing best practices, employers can effectively navigate the complexities of employee bonuses, while employees can ensure they receive what they are entitled to receive.
Understanding these aspects can help both parties benefit from the motivational and financial advantages that bonuses are meant to provide.
Richard B. Johnson is a partner and co-founder at Ascent Employment Law in Vancouver.
