Howard Levitt: How generous holiday bonuses can come back to haunt employers

financialpost.com:

By Howard Levitt and Gregory Sills

The festive season brings with it holiday parties, extended office closures and a spirit of generosity as many companies express gratitude to employees through monetary awards.

But ill-prepared employers can find themselves on precarious footing when it comes to the distribution of bonuses during the holiday season. What may seem like an innocuous gesture of goodwill to alleviate pressure at a festive time of year can unintentionally give rise to an implied term of employment for years to come.

Unbeknownst to many, implied terms of employment through an employer’s conduct can create an unwritten entitlement equally as enforceable as the payment of salary.

In the absence of an enforceable employment contract that clearly and unequivocally establishes bonus awards as discretionary, employees may contend that the historical payment of bonuses establishes a guaranteed component of their annual compensation. This means that companies who face an economically depressed year run the risk of exposure to significant unexpected expenses across the board, as employees who consistently received bonuses can assert an entitlement to their annual payment. This, of course, compounds the adverse impact of a poor year for employers.

To minimize the risk, employers must ensure that employment agreements include language expressly communicating that the payment of variable incentives is truly discretionary, subject to change (including nonpayment), and that any award in one year shall not be construed as creating an entitlement in the future.

As a matter of best practices, contracts should, either expressly or by reference to an existing policy, include objective assessment of at least a portion of