Bonuses and employment/labour standards entitlements

January 3, 2013 Yosie Saint-Cyr, LL.B. Managing Editor Employee Relations, Employment/Labour Standards, HR Policies and Procedures, Human Resources, Payroll, Pensions and Benefits, Source Deductions and Reporting, Wages and Compensation

As the managing editor of The Human Resources Advisor and Human Resources PolicyPro, I am often asked for clarification on bonuses and employment/labour standards entitlements. Essentially, should bonuses be included in the calculation of vacation pay and public holiday pay entitlements, and why?

Employment/labour standard legislation does not completely exclude bonuses from the definition of wages; there are some exceptions where bonuses are considered wages. For example, bonuses are viewed as wages when they are non-discretionary and related to hours worked, production or efficiency. Specific information regarding vacation pay and public holiday pay follows, as well as recommendations to employers regarding bonuses.

Vacation pay

Under employment labour standards legislation across Canada, vacation pay is a percentage of the gross earnings in the 12-month vacation entitlement year or stub period for which the vacation is being given. However, the definition of gross earnings varies by jurisdictions and includes various types of wages.

Gross earnings are wages before taxes and statutory deductions.

In general, wages include regular earnings, commissions, bonuses, overtime, public holiday pay, termination pay and allowances for room and board. They usually exclude such wages as tips, gratuities and severance pay.

Certain jurisdictions also include as part of gross earnings any vacation pay paid out, or earned but not yet paid in the previous year.

For detailed information on what is included or excluded in the definition of gross earnings to calculate vacation pay, refer to each jurisdiction’s respective employment/labour standard legislation. You can also consult HRinfodesk chart 10861.

As to whether bonuses should be included in the calculation of vacation pay entitlements, in general, bonuses and gifts that are non-discretionary or are related to hours of work, productivity or efficiency are included as part of the gross earnings on which vacation pay is calculated. However, discretionary bonuses and gifts that are not related to hours of work, production or efficiency are generally excluded.

Thus, the employer must know the type (discretionary or non-discretionary) and purpose (related to hours of work, production or efficiency) of any bonuses when deciding whether they should be included with wages for the purpose of calculating vacation pay.

Public holiday pay

When deciding what constitutes gross earnings to calculate public holiday pay, the same principle found under vacation pay applies. However, the definition of gross earnings may be different for the purposes of public holiday pay.

For example, in Ontario, for the purposes of calculating public holiday pay, gross earnings include the following regular wages:

• Regular earnings
• Commissions
• Bonuses and gifts that are non-discretionary or that are related to hours of work, production or efficiency
• Allowances for room and board

Gross earnings do not include overtime pay, vacation pay, public holiday pay, premium pay, termination pay and severance pay.

However, for the purposes of calculating vacation pay, gross earnings include the following regular wages:

• Regular earnings
• Commissions
• Bonuses and gifts that are non-discretionary or are related to hours of work
• Allowances for room and board
• Overtime pay
• Public holiday pay
• Termination pay

Gross earnings do not include vacation pay paid out, or earned but not yet paid; tips and gratuities; discretionary bonuses and gifts that are not related to hours of work, production or efficiency (e.g., a Christmas bonus unrelated to performance); expenses and traveling allowances; living allowances; contributions made by an employer to a benefit plan and payments from a benefit plan (e.g., sick pay) to which an employee is entitled; federal employment insurance benefits; and severance pay.

Thus, it is especially important for employers to know and understand the definition of wages under employment/labour standards legislation of their jurisdiction. The legislation explicitly lists the types of payments (e.g., tips, expenses, discretionary bonuses) that are not deemed to be wages for vacation pay, public holiday pay and other purposes.

Planning for bonuses

There are various types of bonuses, and it is important for employers to understand the differences to ensure that the intent of their bonus plan is what they want it to be. That is, if they want to make the bonus part of an employee’s compensation package or not.

This means that employers need to decide if the employer-provided bonus forms part of the employee’s remuneration and is a condition of employment. This determination must be completed when implementing the compensation package and communicated at the time of hire.

In the case of bonuses linked to company profitability and employee retention rather than individual performance and efficiency, the bonus is likely to be classified as a discretionary bonus and not deemed wages. Bonuses that are related to the hours worked, production or efficiency of an employee, on the other hand, are likely to be classified as wages that must be paid.

In addition, when deciding to pay the employee the bonus, courts take into account the primary factors in the provision of the bonus, formulas for calculating the bonus, the employment contract, and whether the employee was a current employee when the bonus was fully earned.

When planning for bonuses, employers are recommended to:

• Ensure that a policy exists that clearly explains your bonus schemes
• Have your policies and procedures in writing and communicate them to each employee
• Be as clear as possible about why the bonus is being awarded: what factors or formulas were used in coming to the amount of the bonus, whether there is an advance and when the bonus is fully earned, and whether the bonus is based on company profitability (discretionary bonus) versus based on individual performance (wages)
• Allow the employee the opportunity to approach the employer with any questions related to the bonus
• Apply the bonus policy consistently and fairly to all employees

Yosie Saint-Cyr
First Reference Human Resources and Compliance Managing Editor

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Yosie Saint-Cyr, LL.B. Managing Editor

Managing Editor at First Reference Inc.

Yosie Saint-Cyr, LL.B., is a trained lawyer called to the Quebec bar in 1988 and is still a member in good standing. She practiced business, employment and labour law until 1999. For over 18 years, Yosie has been the Managing Editor of the following publications, Human Resources Advisor, Human Resources PolicyPro, HRinfodesk and Accessibility Standards PolicyPro from First Reference. Yosie is one of Canada’s best known and most respected HR authors, with an extensive background in employment and labour across the country. Read more

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