In Part 1, we discussed the basics of how the law determines whether an employee is entitled to their bonus after they are dismissed.  If there is no specific contractual wording that determines the issue, then the common law implies a right to receive all elements of pay during the notice period.  In this Part 2, we will look a bit closer at how the law decides whether bonus is payable during the reasonable notice period.

Timing of bonus payout

Timing of the bonus payout is an important question in determining bonus entitlement.  We can use the example of Widget Company and their employee, Alex.  Widget Co. pays out their bonus every December.  Alex was dismissed in January 2018.  If the correct reasonable notice period for Alex is 14 months, then Alex will be entitled to the December 2018 bonus, because he would have received it if he had been given lawful working notice.

If Alex’s notice period is only eight months, then he is less likely to be entitled to the 2018 bonus.  This is because he would not have been employed at the payout date that December even if Widget Co. had given him lawful working notice for eight months.  His entitlement would end in August, before the payout date.  Courts go either way on this point, and some employees are awarded their bonus even if the notice period does not extend to the usual payout date.

Is the bonus discretionary?

There are lots of ways of giving out bonuses, ranging from a $100 Christmas bonus to a targeted profit-sharing scheme based on a metric of personal and corporate performance.

Discretionary

If the bonus is “discretionary”, in the nature of the Christmas bonus, it is less likely to form part of pay in lieu of notice.  This is because the employee had no expectation of receiving any particular amount of bonus in any given year – it’s like a gift.

Formulaic

If the bonus is based on a formula that determines a quantifiable amount of bonus, it is less likely to be discretionary.  It's more likely to be owed to the employee as a term of the contract.  A classic example is an annual bonus paid out after performance reviews / fiscal year-end, based on certain Key Performance Indicators.  The employee expects to receive a bonus every year and is entitled to receive it.

Quasi-Formulaic

There is also a middle category: some employers do not have any bonus formula, but pay out a bonus every year based on performance generally.  This kind of bonus is sometimes referred to as “quasi-formulaic”.  The important question in this case is whether the bonus is integral to the employee’s pay.  Generally the bigger the bonus, the more likely it is to be integral to the employee’s pay.  A court can infer that the bonus was intended to reward the employee for good performance or encourage employees to stay with the employer, and therefore, it should be included in the calculation of pay in lieu of reasonable notice.

Even where there is no written bonus plan, an employee’s bonus often forms part of pay in lieu of reasonable notice.  If they expected it every year and it was more than a friendly gift from their employer, it’s likely an essential term of the employment.  The employer is required to honour it during the notice period.

If you've been dismissed and feel you may be entitled to your bonus as part of your severance package, please give us a call today.  One of our lawyers will be happy to assist you.