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Failing to Communicate Bonus Policy – Employer Ordered to Pay Out Bonus

By Ryley Mennie + Connor Levy + Dan Fogarty - October 31, 2019 under Business Advisory

Case Brief: Thoma v. Schaefer Elevator Components Inc.

The recent BC Supreme Court decision, Thoma v. Schaefer Elevator Components Inc., 2019 BCSC 100 (“Schaefer”), dealt with an employee who was properly terminated with notice, but brought a claim against his previous employer alleging he did not receive the compensation to which he was contractually entitled.  In a summary trial, Justice Riley addressed the issue of whether, in absence of a wrongful dismissal, the employer was liable for payment of discretionary bonuses to the employee for his final year of employment and his six month termination period.  The Court found that the employee was entitled to a bonus for his final year of employment, but not for the portion of his termination period which fell in the following year.

The Schaefer decision is a timely reminder for employers of the best practices for drafting employment contracts and bonus provisions, as well as the importance of clearly communicating compensation policies to employees.

Facts

Schaefer involved an employee, Mr. Thoma, who worked for Schaefer Elevator Components Inc. from September 1, 2013 until October 31, 2017 – he was given notice of termination and provided with six months of his salary as severance per his employment contract.

Mr. Thoma’s employment contract expressly set out the bonus component of his remuneration and the terms by which his bonus was determined.  Specifically, the bonus provisions stated that Mr. Thoma would receive an annual bonus in addition to his annual salary as follows: in his first year of employment, his bonus was set at $12,000, and for subsequent years, he was to receive “an annual bonus of ‘up to’ $24,000 per year, based upon ‘agreed upon targets’ and Mr. Thoma’s ‘degree of achievement’ of those targets”. [Schaefer, para. 3]

Mr. Thoma received the maximum available bonus in the years 2013 through 2016, but did not receive a bonus for 2017.  He argued he had a contractual right to a bonus for 2017 and a pro-rated bonus for the balance of the notice period which extended into the first four months of 2018.  He claimed that the bonus was an integral part of his wage structure and that, based on past conduct, he had a reasonable expectation that the employer would not exercise its discretion against him by declining to pay the bonus.  Mr. Thoma also claimed he was owed vehicle expenses, medical and dental expenses, and pay for accrued vacation leave.

Reasoning

In adjudicating the matter, Justice Riley applied the four factors set out by the BCSC in Gillies v. Goldman Sachs Canada Inc., 2000 BCSC 355 (“Gillies Factors”) to determine whether an employee could be said to have formed a reasonable expectation of entitlement to a bonus. The four factors consist of:

  1. whether a bonus was received in prior years;
  2. whether bonuses were required in order to remain competitive with other employers;
  3. whether bonuses were historically awarded and the employer had ever exercised its discretion not to grant the employee a bonus; and
  4. whether the bonus was a significant component of the employee’s overall compensation.

The Judge found that the Gillies Factors apply to the question of bonus entitlement when the bonus is set out in a written policy, is part of the written employment contract, or is discretionary in nature.  The Court noted that in such cases, it is not a matter of scrutinizing the terms or conditions of the bonus policy, but rather the manner in which the employer implemented those terms in the exercise of its discretion. [Schaefer, para. 20]  Justice Riley cited the Ontario Supreme Court decision, Bain v. UBS, 2016 ONSC 5362 (“Bain”), wherein that Court pointed to an employer’s obligation to exercise discretion with respect to the payment of bonuses in a transparent and fair manner. [Bain, para. 90, Schaefer, para 20]  In Bain, a case that involved an employee’s claim for a bonus after being terminated without cause, the Judge stated:

Simply because a bonus is awarded in the sole discretion of an employer does not mean that it can be done in an arbitrary or unfair fashion or that the employer can decide that an employee should not get a bonus without following a fair, identifiable process … The court must analyze the evidence in a particular case and decide whether the process that was followed was fair and reasonable. [Bain, para. 90]

With respect to the discretionary bonus at issue in Schaefer, Justice Riley stated:

The bonus may be discretionary, but where over the course of the employment it has been awarded in a way that leads the employee to believe the discretion will invariably be exercised in the employee’s favour, this may lead to a finding that the employer has breached the employee’s contractual rights by refusing to pay the bonus in a manner that is not fair or transparent. [Schaefer, para. 20]

After applying the Gillies Factors to Mr. Thoma, Justice Riley made the following observations:

  1. There was no evidence of a formal process for setting goals and targets in order to evaluate Mr. Thoma’s bonus allocation;
  2. The fact that Mr. Thoma received maximum available bonuses when no targets and goals were set out sent the message that the employer would not exercise its discretion against the employee even where the parties had not worked together to set goals and targets;
  3. The employer used inconsistent standards to evaluate bonus awards for Mr. Thoma. These different standards should have been communicated to Mr. Thoma in writing to make the process for determining bonus entitlement transparent and fair; and
  4. The annual bonus was an integral component of Mr. Thoma’s remuneration.

BCSC Decision

Justice Riley found that, based on Mr. Thoma’s reasonable expectation as to how the employer exercised its discretion under the employment contract to pay the bonus, the employer’s refusal to pay Mr. Thoma a bonus in 2017 constituted a breach of his contractual rights.  However, because he was not wrongfully dismissed, Mr. Thoma was not wrongfully deprived of an opportunity to earn an annual bonus and had no contractual entitlement to a bonus for the 2018 portion of his notice period.

In all, Mr. Thoma was awarded $79,526.74 in damages, including $25,000 for his unpaid 2017 bonus, $3,859.70 for unpaid vehicle expenses, $20,390.18 for medical and dental expenses and MSP premiums, and $30,276.86 for accrued vacation leave.

Takeaways

Schaefer reinforces the importance of having carefully drafted employment contracts that govern crucial aspects of the relationship between employer and employee.  Specifically, Justice Riley’s decision reminds us of a couple of best practices:

Active management of employees’ compensation

It is necessary to ensure an employer keeps its hands on the wheel. If an employer fails to clearly specify compensation structure or to communicate that structure to employees in a transparent and fair manner, it may find itself facing unexpected pay outs.

Employee bonuses

It is crucial that employment contracts include clear language stipulating either a formula for calculating the bonus or that the bonus will be determined at the sole discretion of the employer. Bonus provisions should also state that an employee understands and agrees that the bonus is not an integral part of her or his remuneration.  When the terms of a bonus plan are not outlined in a written employment contract, the courts will look to the conduct and the historical practice of the parties in determining whether the employee has formed a reasonable expectation that the employee will receive a bonus as part of their remuneration.  At the end of the day, any policy with respect to determining bonus entitlement must be communicated to employees in a transparent and fair manner – ideally in writing.

Want More?

If you have questions about best practices concerning employment contracts or how to properly structure employee bonuses, please reach out to Ryley Mennie, Connor Levy or Dan Fogarty on our employment law team.

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