You may think you can stop providing or vesting discretionary incentive bonuses, whether it's cash, restricted stock units ("RSUs"), options or otherwise, for terminated employees, because they are "discretionary" and there is no need to incentivize a terminated employee. That makes business sense, but the court may rule against you, resulting in you paying huge, unexpected damages.
This is because employers may lose their discretion upon terminating employees without cause, if the bonus is an integral part of the compensation. If the employment contract fails to contract out of this entitlement, the courts may order the employer to provide such bonus, despite that the employer exercised its "discretion" not to do so.
Recent cases from BC and Ontario demonstrate this peril.
Gale v Fairmont Hot Springs Resort Ltd., 2025 BCSC 2690 [Gale]
In Gale, the ex-employee, Mr. Gale was a Director of Sales and Marketing, with compensation consisting of a base salary and an incentive bonus of up to 25% of his base salary. The employer ("Fairmont") terminated him without cause, giving him the termination notice on February 8, 2024, effective on February 29, 2024. Fairmont refused to pay him the incentive pay for the last few months and during the termination notice, because they argued that the incentive bonus "was discretionary, conditional, and expressly contingent on continued employment" and they "did not exercise their discretion to award one."
Mr. Gale's employment contract also included language outlining the discretionary nature of the incentive bonus, including a phrase stating that the bonus was "at the sole discretion of the Company," a common feature of such bonus provisions.
At "the sole discretion of the Company," right? Not so fast.
The judge found the bonus was indeed discretionary, but explained, "following a without-cause termination, a bonus becomes no longer discretionary, if the bonus is an integral part of the employee's compensation package." The judge found the bonus was an integral part of the employee's compensation, because (i) there was a consistent pattern of paying the bonus, (ii) there was no past exercise of discretion of not granting it, and (iii) the bonus was a significant part of the employee's total compensation. In addition, the judge found that the employment contract did not unambiguously contract out of paying the bonus to Mr. Gale.
Eventually, the court found Mr. Gale was not only entitled to the bonus during the last few months prior to his termination, but also during the common law reasonable notice period after the termination notice date.
Adelman v. IBM Canada Limited, 2026 ONSC 420 [Adelman]
In contrast, in a recent Ontario case, the court found that the discretionary bonus was not an integral part of the employee's total compensation and therefore refused to award it. In Adelman, the judge reiterated a similar test to determine whether a bonus was an integral part of the employee's compensation, the court looked at (i) whether there was a pattern of granting bonus, (ii) whether the bonus was necessary to keep the employer competitive with other employers, (iii) whether the employer ever exercised their discretion not to award the bonus, and (iv) whether the bonus was a significant part of the employee's total compensation. This time, the court sided with the employer, IBM, because (i) the bonus was not paid every year, (ii) market competitiveness was not featured into decision of awarding bonus, (iii) the bonus could be as low as zero, 3.6%, or up to 16.6% of the base salary, which showed that IBM exercised their discretion and it was not always a significant part of the total compensation.
However, it was not all good news for IBM in Adelman. IBM cancelled and unvested RSUs and stock options that would have vested the month after Mr. Adelman's termination, relying on their employment contracts and related documents. One might have assumed that an employer as sophisticated as IBM would have prepared its employment contracts correctly for that very purpose. Unfortunately, IBM had to concede that its legal documents failed, due to a drafting ambiguity found by the court in a previous decision, Milwid v. IBM Canada Ltd., 2023 ONCA 702. Thanks to that drafting issue alone, the court ordered IBM to pay $269,508.27 for their cancellation of RSUs and stock options. IBM also paid damages for other reasons.
The Bottom Line
So, what should employers do to avoid the same fate? They should build a pattern of exercising their discretion and, perhaps most importantly, have employment counsel review employment contracts on a regular basis.
Exercising discretion
This is extremely important in order to avoid establishing a consistent pattern of paying bonuses, examples of which include: (i) not paying the bonus at the same time of the year (ii) not paying similar amounts or, (iii) not granting the bonus at all.
Having experienced employment lawyers review employment contracts
Think about IBM's above loss, which was far from rare even among the most sophisticated employers.
Because of the imbalance in bargaining power between employers and employees, judges will interpret employment contracts in favour of employees whenever possible. This sets employment contracts apart from typical commercial contracts, the former of which require specialized knowledge in order to be drafted lawfully.
Also, employment law is constantly evolving; a good employment contract may not always withstand such developments. It is good idea to review employment contracts periodically or when a significant decision is made.
If you require assistance with similar issues or reviewing your employment documents, please do not hesitate to contact us for expert advice and guidance.
