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The official word on unofficial bonus policies

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On September 25, 2017, the Ontario Superior Court of Justice released its decision Fulmer v. Nordstrong Equipment Limited, 2017 ONSC 5529 (“Nordstrong”), where the Court dealt with a wrongful termination case, and issued a noteworthy determination on an employee’s bonus entitlements.

The Facts

The Plaintiff, Glen Fulmer (“Fulmer”) worked as a controller for Nordstrong Equipment Limited (“Nordstrong”) from August 2010 until December 12, 2016. During his tenure at Nordstrong, Fulmer was paid a bonus in each year of his employment – this bonus was determined at the sole discretion of Nordstrong East’s president.

Throughout the hearing, Nordstrong maintained that it had an “unofficial policy” which held that a terminated employee would not be provided with any bonus, pro rata or otherwise. This “unofficial policy” and explanation of bonus payments was not articulated in an initial employment contract (as there was none), nor was it acknowledged in the termination letter. The termination letter was also absent of any mention of job performance issues.

Nordstrong argued that post-termination, it discovered issues related to Fulmer’s performance which would have led Nordstrong to use its discretion and deny Fulmer his 2016 bonus (as discretion to pay bonuses was not exercised until February following the end of the fiscal year). Nordstrong argued that since the bonus was discretionary, and issues had since been discovered relating to the plaintiff’s alleged poor performance, no bonus would have been payable.

The Judge found that Nordstrong was seeking reasons to justify its “unofficial policy” of not paying out a bonus to any terminated employees and determined that Fulmer was indeed entitled to his 2016 bonus. The Judge looked to Nordstrong’s profitability for 2016 and compared it to previous years to forecast Fulmer’s 2016 bonus payment – Fulmer was awarded $20,000.00 for his 2016 bonus.

Fulmer also argued that he was entitled to his 2017 bonus throughout his court-determined ten month reasonable notice period (which would extend to October 2017). The Judge however did not side with the plaintiff on this issue and pointed to Nordstrong’s historical treatment of bonus payouts – that being that they were calculated at the conclusion of the fiscal year, and on the basis of the employee’s positive contributions to the company. The Judge further held that payment of the bonus was not within the reasonable expectation of the plaintiff (who was also charged with a duty to mitigate his losses during the ten month notice period that the court found to be his reasonable notice period). The court denied Fulmer the 2017 bonus.

 RT Takeaways

While the Nordstrong decision is predictable in its assessment of reasonable notice damages and the duty to mitigate in wrongful termination cases, it also offers insight into how the courts view bonus entitlements. Below are a few valuable lessons for employers:

  • How the court views bonus entitlements when there is no official policy in place

Nordstong makes clear, that in the absence of an official policy, the court will look to what is fair and reasonable in the circumstances. This means not only looking to whether it is fair and reasonable for the employee to receive the bonus, but also whether the quantum of the bonus is fair and reasonable.  The court will not support an arbitrary or unfair application of a bonus policy, and will make a negative inference against an employer who seeks reasons to justify its “unofficial policy”.

To avoid similar situations, an employer will want to ensure:

a) Bonus policies are in writing;

b) Bonus policies follow a formal procedure and uniform application; and,

c) That employees are made aware of bonus entitlements and eligibility.

It would also be prudent to ensure inclusion of such policies in an employment agreement and stipulate employees’ eligibility or lack thereof upon termination of employment. Following such practices will assist in managing the expectations of all parties, and may limit an employer’s exposure to liability.

  • How the court will assess the quantum of a bonus entitlement when there is no official policy in place

To determine an employee’s bonus entitlement when there is an “unofficial” and discretionary policy in place, the Judge will look to past practice and assess what is fair and reasonable in the circumstances. The court will consider the bonus amounts paid in previous years and take into account the factors affecting bonus payouts. In Nordstrong, one of those factors was profitability. As such, the court looked to the company’s profitability forecast to determine what a reasonable quantum would be.

To avoid uncertainty, an employer will not only want to have their bonus policy in writing, but also a description of how bonuses are to be calculated. In the absence of such clarity, the court will look to what is fair and reasonable in the circumstances.

  • How the court views entitlement to a bonus during the reasonable notice period when there is no official policy in place

In the absence of an official policy, Nordstrong tells us that the court will consider that the purpose of reasonable notice is to provide a terminated employee with sufficient time to locate comparable employment and therefore a claim to notice period bonus entitlements can be too far reaching. The Judge held, “I do not find it to be within the reasonable expectation of the plaintiff (charged with a duty to mitigate his losses) to be able to earn a bonus for the 2017 calendar year while he searched for alternative, comparable employment” (at para 25). The court will also look to when bonuses are typically earned and calculated as a factor in determining eligibility. In Nordstrong’s case, it was at the conclusion of the fiscal/calendar year (which were one in the same) and Nordstrong’s reasonable notice period ended prior to the year end.

Patrizia Piccolo with assistance from Maria Luisa Vitti, articling student

About the Author: Toronto Employment Lawyer Patrizia Piccolo is a trusted advisor to senior executives in transition; provides strategic advice and training to both large and small employers and their human resources and management teams; and is entrusted by employers and their counsel to conduct investigations into harassment and other problematic workplace behaviour. She also advises employers on employment related regulatory issues including, Employment Standards Act, Human Rights Act, Labour Relations Act and Workplace Safety and Insurance Act compliance.

Maria Luisa Vitti is Rubin Thomlinson’s first ever articling student. Maria Luisa provides support to the firm’s employment law and workplace investigation practices.