Lack of Clarity on Discretionary Payments Benefited Terminated Employee

Written by Daniel Standing LL.B., Editor, First Reference

In Thoma v Schaefer Elevator Components Inc., 2019 BCSC 100 (CanLII), the British Columbia Supreme Court re-affirms the need for employers to establish and communicate clear and explicit rules when discretionary bonuses form part of an organization’s compensation scheme. These rules should regulate an employee’s entitlement to bonus payments (both during employment and during a notice period), as well as the eligibility criteria and how and when payments are to be made. This case shows how a lack of clarity in this respect can expose an employer to significant financial liability, even if the underlying termination is conducted properly and with reasonable notice.

Key facts

The employee was hired by the employer, an elevator company, to set up and run a production facility in Surrey, British Columbia. He had signed a written employment contract which was to run from July 1, 2013 to June 6, 2018. Under its terms, the company could terminate the employee’s employment on six months’ notice, in which case the employee was entitled to receive “contractually agreed remuneration during the six months notice period,” including compensation for any accrued vacation leave. The contract provided that his remuneration would include a monthly salary of $8,000 and an annual bonus of $12,000 in 2013 and annual bonuses of “up to” $24,000 per year in subsequent years based on “agreed upon targets” and the employee’s “degree of achievement of those targets.” The contract also provided for benefits including a company car for both work and private use and 30 days of annual vacation leave. Finally, the contract stipulated that the company would “contract” a comprehensive medical and dental package.

The employee began work on September 1, 2013, and worked with the company until October 31, 2017, when his contract was terminated and he was paid six months’ salary. While he was an employee, the company paid him the full amount of his bonus in 2013 (pro-rated), 2014, 2015 and 2016 but declined to pay him any bonus in 2017.

The employee’s claim

The employee sued his former employer, claiming that the company had breached the terms of the contract by failing to pay him the full amount of remuneration he was entitled to under the contract, in the final year of the contract, and during the notice period. Specifically, he argued that he had a reasonable expectation that the employer would not exercise its discretion against him by refusing to pay the full bonus in 2017 and during the notice period which extended into early 2018.

The court’s decision

First, the judge considered whether the employee had a contractual right to the employment bonus, whether in the final year of the contract, or during the notice period. The judge relied heavily on the reasoning in Gillies v Goldman Sachs Canada Inc., 2000 BCSC 355 (CanLII) where the British Columbia Supreme Court provided a list of factors that help determine if an employee has a reasonable expectation of entitlement to a bonus: (a) whether a bonus was received in prior years; (b) whether bonuses were required in order to remain competitive with other employers; (c) whether bonuses were historically awarded and the employer had ever exercised discretion against the employee; and (d) whether the bonus was a significant part of the employee’s overall compensation. The judge noted that these factors have been applied in other cases to determine entitlement to a discretionary bonus, not just during a reasonable notice period following dismissal, but also during the period leading up to dismissal, even where the terms of the bonus are spelled out in a written policy that forms part of the employment contract.

In those cases, the court said, it is not the conditions of the bonus policy that are under scrutiny, but the way the employer implemented the terms in the exercise of its discretion. Even though a bonus is discretionary, if the employer awards the bonus in a way that the employee is led to believe that the discretion will always be exercised in his or her favour, it could lead to a finding that a refusal to pay the bonus is a breach of the contract in a way that is not fair or transparent.

In this case, the company paid the employee the maximum allowable bonus each year until the final year in 2017. There was some dispute between the parties as to who had the responsibility for setting goals and targets in relation to the bonuses, and whether they in fact discussed goals and targets during the period of employment. The judge read the contract as making this a joint responsibility of both parties. The employer admitted that no goals or targets were set in 2016 and yet the full bonus was paid. This, according to the judge, “sends the message that the employer will not exercise its discretion against the employee even where the parties have not worked together to set goals and targets.” If the employer intended to hold the employee to a different standard in 2017, it should have formally communicated this expectation to him in writing. This would have given him fair and transparent notice that if he wanted a bonus in 2017 he would have to press the employer to put in place clear performance markers that he would have to meet. This did not happen.

Applying the Gillies factors, the court concluded that the annual bonus was an integral component of the employee’s remuneration. The way the bonus was paid out in the years of his employment, including in 2016 with no formal setting of goals or targets meant that the company’s refusal to pay a bonus in 2017 amounted to a breach of the employee’s rights under the contract, entitling him to a pro-rated bonus of $20,000 for that year. However, since his employment lawfully came to an end with the appropriate amount of notice, he was not wrongfully terminated, so no bonus was due beyond the date of termination. An additional $5,000 was granted under this heading for work done by the employee’s wife during the first 10 months of 2017, given that the company had previously agreed to compensate her at the rate of $500 per month.

Moving on from the issue of the discretionary bonus, the court then considered the employee’s entitlement to compensation for expenses he incurred in relation to his company-issued vehicle, awarding him a further $3,859.70 for expenses incurred during the notice period because although he was not working, the employment contract stated that the car was for both work and personal purposes.

Next, regarding the employee’s claim for medical and dental expenses, the court found that because the company had failed to live up to its contractual commitment to “contract” a medical and dental plan, it had to reimburse the employee for his out-of-pocket medical expenses which totalled a further $20,390.18. Lastly, the parties agreed that the employee was entitled to be paid for 82 days of accrued vacation leave, amounting to $30,276.86 in damages under that heading. All told, the employer was required to pay the employee damages in the amount of $79,526.74.

Takeaways for employers

Employers must be aware that their behaviour regarding salary bonuses may, in some cases, allow an employee to reasonably expect that a bonus will be paid as part of the overall wage structure, even though the employer has discretion. As in this case, this expectation can arise as a result of the employer consistently choosing to pay the employee a bonus without reliance on any clear rules establishing an objective standard for entitlement to it. Employers must ensure that any preconditions the employee must meet before he or she is entitled to a bonus or other discretionary payment are clearly communicated in advance. Otherwise, the employee’s reasonable expectation about how the employer will exercise its discretion may well trump the employer’s true wishes.

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