Canada: Bonus and Incentive Plans in Canada.


Bonus and Incentive Plans in Canada.

Canadian employers use bonus and other incentive plans' to encourage performance and foster loyalty from their employees. At times, the incentive component can be as high as 70% to 80% of an employee's overall compensation. As such, in certain types of jobs, bonuses and incentive plans are of great significance in the Canadian employment context.

Types of Incentive Plans
Employers distribute bonuses in the form of variable lump-sum payments determined with reference to the performance of the individual employee, a group of collective employees and/or the organization as a whole. Bonuses may be utilized to encourage future performance or reward past performance. Other forms of incentives include commissions and profit-sharing as additional methods of financial compensation. A commission represents a sum received by employees for transacting business, generally in the form of a percentage, whereas a profit-sharing plan is a method of remuneration by which employees receive a part of the employer's net profit.(1) Non-cash incentives are also used to motivate employees by way of awards and prize.(2)

Significance of Termination
Bonus and incentive plans become an issue in the Canadian legal context when an employee is terminated prior to the calendar year-end or the company's year-end. There are two factors are used to determine whether a former employee is entitled to a year-end bonus or a bonus for the pay in lieu of notice subsequent to termination of employment. These factors are whether the bonus is an integral part of the employee's compensation and whether the bonus is discretionary. Bonuses or incentives integral to an employee's compensation will form part of severance and termination pay for the reasonable notice period or pay in lieu of notice, unless the bonus or incentive is at the absolute discretion of the employer.(3)

Employers may circumvent the requirement to pay former employees bonuses or incentives subsequent to termination or severance, despite the bonus or incentive being integral and non-discretionary. In order to accomplish this, employers must communicate any conditions clearly to their employees.(4)

An example of such a condition is that the employee must be actively employed at the time the bonus or incentive is paid out, thereby eliminating payment to any employees that have been terminated or severed. In 2011, the Ontario Superior Court of Justice determined that merely posting information regarding bonus limitations to a company's computer network was insufficient to demonstrate that the employee was aware of any conditions or limitations placed upon the company's bonus plan.(5) In that case, the Court searched for evidence that the employee had assented or agreed to the limitation.(6) It is the employer's responsibility to ensure that employees are made fully aware of any conditions or limitations on bonus or incentive plans. If the employer has failed to do so, then the employer may not rely on the applicable condition or limitation.

Additionally, Canadian courts will not reward bad behaviour. If an employee is terminated for "cause" which includes such things as theft, misconduct, breach of contract etc., the employee will lose his or her right to a bonus payment and as well pay in lieu of notice; otherwise, known as common law severance or termination pay.

1 "Commission", online: Merriam-Webster, Incorporated <http://www,>; "Profit Sharing", online: Merriam-Webster, Incorporated
2 "Bonuses and Incentives", online: Chartered Institute of Personnel and Development <>.
3 Daniels v Canadian Tire Corp (1991), OJ No 1788, 29 ACWS (3d) 821.
4 Poole v Whirlpool Corp, [2011] ONSC 4100, 205 ACWS (3d) 689.
5 Ibidat para 33.
6 Ibid.