Bonuses may make up a significant portion of pay for executives, senior managers, and other high skilled employees. Upon termination of the employment relation, notice or pay in lieu is meant to place an individual in a similar place had they not been terminated. Pay in lieu is refereed to as ‘notice pay’. Notice pay is how the courts determine the amount of pay in damages that an employee that was denied reasonable notice is owed. Consistent with this principle, discretionary bonuses may need to be included in an employee’s a severance when choosing no to give notice of termination.
Discretionary Bonuses
A discretionary bonus, by definition, is awarded at the employer’s will without objective criteria. When included in an employment contract, discretionary bonus will clearly specify that the bonus is solely to the determination of the employer and may or may not be granted. Employers often will argue that since the bonus is discretionary, it should not have to be included in notice pay. However, there are scenarios where discretionary bonuses will be included as damages by the courts when assessing the amount of notice pay the employee is owed.
Discretionary Bonuses and Notice Pay
When the employee has been with the employer for many years and the bonus was paid regularly, it is likely to be included in the notice pay, especially if it composed a significant portion of the employee’s total compensation. The less often and regular the bonus was paid, the greater the chance the bonus will not be included in the notice pay. Further, courts have also determined that if current employees of a similar position and status receive a discretionary bonus, the terminated employee must also receive the payment of the discretionary bonus in their notice pay.
Final Remarks
Overall, it is important for the discretionary bonus clause to be unambiguous because any difficulty in interpretation will fall in the employee’s favour. In addition, where the bonus is labeled as discretionary in the employment contract, but in practice is subjected to objective criteria, the courts will not view this as discretionary. When dealing with executive type compensation, properly drafted contracts and practices are very important. What was initially thought to be an agreed upon contact may end up being very costly for an employer. it is advisable to seek legal expertise when drafting contracts that seek to define the limits of severance payment with regards to discretionary bonuses.