The end of the first quarter is bonus season for many companies, a period when employees feel waves of hope and high expectations. For many, it is not only a time when a year’s worth of hard work comes to fruition, but one that deeply impacts financial planning decisions for the year ahead.

Legal implications

Although the majority of employment contracts indicate that the award of an annual bonus is not guaranteed and falls within the sole discretion of the employer, such phrasing is almost invariably insufficient to dispense with an employee’s entitlement to an annual bonus.

In order for “discretionary” language to be enforceable, there needs to be a history of actual discretion. For example, if the company provides the same $2,500 bonus at holiday season each year, then it is likely that the courts will interpret this as forming an expected, therefore required, component of the employee’s compensation terminable only on sufficient (usually a year) notice of a change.

Similarly, if an employment agreement indicates that one’s bonus will be tied to their individual performance, but in actuality that bonus is historically driven by company performance, it will be difficult to then rely on an employee’s performance to deprive them of this award.

When individual performance is relevant, employers ought to rely upon an objective rubric applied equally across the board. Failure to do so transparently creates difficult situations where an employer is unable to justify any disparity in awards, thus exposing the company to potential constructive dismissal claims amid allegations of discriminatory practices. Similarly, if the bonus is premised on completion of goals to be set out but no goals are set out, the employee is presumptively entitled to the full bonus.

Contracts are increasingly being thrown out by the courts for even the slightest potential breach of an employment standard. Take, for example, the recent decision in Dufault v The Corporation of the Township of Ignace, where the employer’s purported “sole discretion” to terminate the employee “at any time” was found to wholly invalidate a contract’s enforceability, as it has the potential to run afoul of the Employment Standards Act. This drafting error cost the employer over $150,000 in severance, plus the costs of the hearing.

Employers and employees alike must pay close attention to the realities underlying each employment relationship, as that is what our courts look to when assessing an employee’s contractual rights, regardless of the contract’s terms. The reality is that our courts are finding ways to invalidate the enforceability of contracts because, as the drafter of the agreement, the employer typically bears the onus of drafting the language in a manner that is clear, unequivocal and (of course) lawful.

This employee-centric approach to contractual interpretation isn’t going away. Employers must remain mindful of that when reaching an agreement.