What happened to my job bonus this year?

Q. I have worked for seven years as a middle manager/salesperson in the sales department of a medium-sized firm in Ottawa. When I took this job, it was agreed that my pay would be made up of salary plus a bonus that has worked out to roughly 20% of my total salary annually. With a new company president this year, I have been told that bonuses will be eliminated and I will only be paid my salary going forward. That’s a whopping 20% cut in may annual compensation, which my family relies on for key living expenses (daycare for my two kids, mostly).

Are they allowed to do this after seven years? Is there any way the company can be held to maintain my pay structure the way it is? Should I speak to the Human Resources (HR) department about this—or a lawyer? I don’t want to leave the company but if push comes to shove, I may have to. In that case, what compensation/severance could I hope to receive if I have to find a new job?

–Irwin

A. Irwin, I gather from your question that you may not have a contract in writing that entitles you to a specific bonus amount.

With this in mind, I’ll start by saying that there are two kinds of bonuses:

1. A bonus based on a contractual entitlement; and
2. A discretionary bonus.

Let’s start with the first type of bonus—the one based on a contractual entitlement, because it’s fairly straight forward. If you have a contract that defines an entitlement to a specific amount as a bonus, that is the amount you get, and you get it because you are entitled to it under your contract. For example, your annual bonus could be 20% of the value of the goods that you sold that year. (Note, there is often some fine print on these provisions, such as your bonus is based on the amount sold and shipped, or the amount sold and paid for; but this is how a contractual bonus works.) This is the type of bonus you should negotiate when you start a new job if you want to be sure that is what you are going to get.

The second kind of bonus—a discretionary one—is a bit tricky. By discretionary bonus, I mean that the boss uses their discretion to decide each year how much you get, or even whether you get anything at all. This is what happens when there is no contractual provision defining what you receive.

In situations like this, the boss might give you $10,000 one year, nothing the following year, and $20,000 the year after that. Again, whether you get anything at all, and if so, how much, is at the discretion of the decision-maker.

If an employee has received $20,000 every year for many years, that’s good evidence that a bonus of $20,000 might have been, or became, part of their employment contract.

Obviously, the discretionary approach isn’t ideal for the employee at businesses where bonuses are being reduced, or are eliminated altogether. What I often see is that things were good years ago and employees received significant bonuses each year. Then things slowed over time, and bonuses decreased over the years as well.

In your particular case, Irwin, if you have a strong history of having received 20% each year for all seven years, that might support an entitlement to this bonus; however, the fact that it isn’t in your contract is still a problem.

It might be worth going to HR, or your boss, or even the new president, to raise the concerns you have related to having received 20% as a bonus for seven years and, now, not being provided with any bonus. Practically speaking, if they value you as an employee, they will probably give something.

If they refuse to provide you with the bonus, you could work with an employment lawyer and try to prove a constructive dismissal, meaning that an employer makes a unilateral change to an employment contract that amounts to a breach of the contract. A constructive dismissal always carries risk because the employee resigns first, and then sets out to prove the termination. If they don’t succeed in proving that the circumstances amount to a termination, it is considered a resignation—not a termination. And as the result of a resignation, the employee gets nothing.

If you were to succeed in establishing that ending your bonus amounts to a constructive dismissal, you would be entitled to pay in lieu of notice of the termination. A meeting with your employer, HR department and possibly an employment lawyer could help you determine what this amount should be.

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About Scott Hawryliw

Scott Hawryliw practises civil litigation law as a partner at Stewart Esten LLP in Barrie, Ont., with an emphasis on wills and estates, employment law, real estate disputes and general commercial litigation.

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