Many Canadian employees rely on an annual bonus as a significant part of their total income. However, when it comes time for payouts — or if an employee is let go — employers frequently attempt to withhold the money by claiming the bonus was strictly “discretionary.”
If your employer is refusing to pay your bonus, or excluding it from your severance package, do not assume they have the legal right to do so just because of the wording in your contract.
The Quick Answer: What does discretionary bonus mean? A true discretionary bonus is an unpredictable, spontaneous payment that is not tied to any specific formula or performance metric. However, under Canadian employment law, if an employer pays a “discretionary” bonus consistently year after year, courts will often rule that it has become an integral, legally binding part of your compensation that cannot be arbitrarily withheld.
On This Page:
- 1. What is a Discretionary Bonus?
- 2. The “Discretionary” Label Myth
- 3. What Makes a Bonus Mandatory
- 4. Discretionary Bonus and Severance
- 5. Review Your Case
What is a Discretionary Bonus?
In employment law, bonuses are generally divided into two categories: non-discretionary (based on a strict mathematical formula or sales target) and discretionary.
A discretionary bonus is a payment where management retains complete flexibility over whether the bonus is paid at all, and how much the payout will be. True discretionary bonuses are usually tied to unpredictable factors, such as an exceptionally good financial year for the company, and are often given as a surprise.
The “Discretionary” Label Myth
To protect themselves from financial liability, HR departments will often write a clause into employment contracts stating: “All bonuses are paid entirely at the sole discretion of the employer.” Employers rely on this label to justify withholding payments when an employee resigns or is terminated. This is a common corporate myth.
Canadian courts have repeatedly ruled that an employer can’t hide behind the word “discretionary.” The law requires employers to exercise their discretion reasonably and in good faith. They can’t use their discretionary power arbitrarily to punish an employee, discriminate, or avoid paying someone who has genuinely earned the compensation.
How Courts Determine if a Bonus is Mandatory
Even if your contract explicitly calls your bonus “discretionary,” a judge will look at the actual reality of how you were paid. If a dispute arises, courts look at several factors to determine if your bonus legally transformed into a mandatory entitlement:
- Consistency: Have you received the bonus every single year around the exact same time (e.g., every December)?
- Proportion of Income: Does the bonus make up a massive percentage of your overall annual take-home pay?
- Historical Calculation: Even if it isn’t written down, does the company seem to use a consistent formula (like a specific percentage of base salary) to calculate the payout each year?
Discretionary Bonuses and Severance Pay
The most common time employers try to weaponize the discretionary label is during a termination. They will hand you a severance package based only on your base salary and claim you have forfeited your bonus because you are no longer an active employee.
If you are terminated without cause, you are legally entitled to a reasonable notice period, which can last up to 24 months. Under common law, your severance package must replace all the compensation you would have earned during that notice period.
If your “discretionary” bonus was historically treated as a regular, expected part of your income, your employer must legally include it in your severance calculation.
Review Your Case with an Employment Lawyer
If your employer is refusing to pay an expected bonus, or if they have offered you a severance package that excludes your historical bonus payouts, do not accept their decision without getting legal advice.
The employment lawyers at Samfiru Tumarkin LLP have successfully challenged thousands of unfair corporate bonus policies. We can review your employment history, invalidate unreasonable discretionary clauses, and fight to secure the full compensation you have rightfully earned.