Bonus policies can be a great employee incentive, but they might also be putting your company at risk.
When an employee is terminated, the employee’s bonus entitlement can become a contentious matter, especially if the employee claims they’re entitled to a portion – or the entirety – of their bonus as part of their termination payout.
A recent Court of Appeal’s decision regarding bonus payments determined that generally speaking, an employee is entitled to damages instead of a bonus on termination unless there is specific, clear language limiting the employee’s termination entitlements.
Important Takeaways From the Court of Appeal’s Decision
- Bonus policies should be carefully evaluated for clarity of language. Bonus policy language must be precise if it removes an employee’s bonus entitlement upon termination.
- Bonus policy language should contain a statement indicating that only “active employees” are entitled to payouts, or that a bonus is not payable “if termination occurs before the payout of the bonus.” The goal is to ensure there is no unambiguousness in the language. Remember, when it comes to contracts, ambiguity benefits the person who did NOT draw up the agreement.
- Make sure you bring the bonus post-termination limitation to the attention of your employee’s before they begin their employment with your company.
- Always run amendments to your bonus policy past a lawyer with specialized knowledge and expertise to ensure the proposed changes are enforceable and do not unexpectedly expose your company.
- If litigation results, submit all available evidence and documentation supporting the bonus calculation to the Court. Failure to do so could result in the Court applying an “averaging” formula that would end up costing your company significantly more.
When it comes to contentious issues, such as post-termination bonus payout policy, it’s vital to explicitly detail the rights of the employee and the duties of the employer upon termination of that employee. A carefully written, properly executed employment contract can protect your company from costly claims and unexpected liabilities.