The British Columbia Supreme Court decision in Thoma v. Schaefer Elevator Components Inc.,  B.C.J. No. 111, re-affirms the need for employers to establish and communicate clear and explicit rules when discretionary bonuses form part of an organization’s compensation structure. These rules should regulate an employee’s entitlement to bonus payments (both during employment and during a notice period), as well as the eligibility criteria and how and when payments are to be made. As the Thoma case illustrates, when clear rules are not in place the focus shifts from how the employer applied the performance criteria, to how the employer exercised its discretion in declining to award a bonus.
Mr. Thoma commenced employment with Schaefer in 2013 as Vice President and was specifically employed to set up and run a production facility in Surrey. As is often the case, Mr. Thoma’s employment contract included a provision that he would receive an annual bonus. The bonus amount for 2013 was agreed to in the employment contract, and for subsequent years the contract stated that Mr. Thoma would receive “up to” a certain amount per year based upon “agreed upon targets” and Mr. Thoma’s “degree of achievement” of those targets.
After Mr. Thoma’s employment was terminated on notice in October 2017, a dispute arose as to whether Mr. Thoma had a contractual entitlement to receive a pro-rated bonus for 2017, as well as during his notice period. Mr. Thoma argued that he was entitled to these bonus payments because it formed an integral part of his wage structure and because the employer’s past conduct created a reasonable expectation that it would not exercise its discretion against him. His reasonable expectation stemmed from the fact that the employer paid his full bonuses for all prior years, despite the fact that no performance goals or targets were ever set (and therefore not achieved). The bonuses were paid in circumstances where Mr. Thoma did not achieve pre-determined goals or targets as required by his employment contract, and despite the less than satisfactory performance of the production facility.
The court found that Mr. Thoma had satisfied the onus of establishing a contractual entitlement to the bonus payments. What was fatal to the employer’s case was that it paid bonuses to Mr. Thoma without following a formal review process and without measuring Mr. Thoma’s performance against pre-determined goals and targets. There was accordingly no connection between the payment of the bonuses and Mr. Thoma’s actual performance as measured against any objective criteria.
Importantly, the court confirmed the existence of a contractual entitlement based only on the exercise of the employer’s discretion which created an expectation that bonuses would be paid without regard to Mr. Thoma’s performance or the performance of the production facility.
Establishing and clearly communicating the rules and criteria of a discretionary bonus plan is essential. When this is done, courts are less likely to scrutinize the manner in which the employer exercised its discretion as a basis for finding a contractual entitlement. Instead, the focus will shift to whether the employee’s performance met the eligibility criteria. That is not to say that discretion then plays no role, but the discretionary element of the process becomes more predictable, transparent and controlled. The emphasis shifts to how the employer applied the rules and criteria in exercising its discretion. It is a subtle distinction, but an important one. Finally, be sure to communicate the rules and criteria to employees!