- " The contract says a bonus is paid to employees "employed on the payout date" but never says what happens if the employee was terminated, resigned, or was on leave partway through the year.
- A clause that will actually hold up needs to address each of the following: 1.
- Simply calling a payment "discretionary" in the offer letter does not make it so — if a bonus has been paid every year using a consistent formula, a court may look past the label to how…
Bonus and commission structures are one of the most disputed pieces of an Ontario employment relationship — not because employers intend to shortchange anyone, but because the paperwork rarely anticipates what happens when an employee leaves partway through the earning period. A well-drafted bonus clause in an employment contract does more than describe how the number is calculated; it decides, in advance, what happens on the messiest day of the relationship: the day someone walks out or is let go.
Employers who leave this vague are not saving time. They are deferring a fight — often to a moment when the employee has already left and has little reason to compromise. This article walks through what a solid clause should cover and where employers most often get it wrong.
Why Bonus and Commission Disputes Happen
Most disputes trace back to one of three gaps in the original contract or plan document:
- No definition of "active employment." The contract says a bonus is paid to employees "employed on the payout date" but never says what happens if the employee was terminated, resigned, or was on leave partway through the year.
- No calculation formula in writing. Verbal understandings about commission rates or thresholds are hard to enforce and easy to dispute once the relationship sours.
- No language addressing termination. Silence is the biggest risk. Courts have generally required clear, unambiguous contract language before an employer can cut off a bonus or commission an employee would otherwise have earned during a notice period.
What a Bonus or Commission Clause Should Define
A clause that will actually hold up needs to address each of the following:
- Eligibility — who qualifies, and whether eligibility depends on being actively employed on a specific date.
- The calculation method — the metric, formula, or targets used, described in plain terms the employee can actually verify.
- Timing — when the earning period runs and when payment is made.
- Discretion vs. entitlement — whether the employer retains genuine discretion over whether a bonus is paid at all, or whether it becomes owing once targets are met.
- What happens on departure — resignation, termination with cause, termination without cause, and leaves of absence should each be addressed, not lumped together.
- Proration — whether a partial-year or partial-cycle amount is paid, and how it is calculated.
Discretionary vs. Contractual Bonuses
| Feature | Discretionary Bonus | Contractual / Formula-Based Bonus |
|---|---|---|
| Employer's control | Retains real discretion over amount and whether it's paid | Owed once conditions are met |
| Risk on termination | Lower, if genuine discretion is documented and exercised consistently | Higher — employee may argue entitlement continues through the notice period |
| What courts look for | Evidence the discretion is real, not a label | Clear, specific limiting language if the employer wants to cut it off early |
| Best practice | State the factors considered, even if amounts vary | Put the full formula and eligibility rules in writing |
Simply calling a payment "discretionary" in the offer letter does not make it so — if a bonus has been paid every year using a consistent formula, a court may look past the label to how the plan actually operated.
The Mid-Cycle Departure Problem
This is where most disputes actually land. When an employee is terminated without cause partway through a bonus or commission cycle, two separate questions arise:
- Is anything owed for work already done before termination? Generally, yes — earned commission on completed sales, for example, is difficult to withhold regardless of contract wording.
- Is anything owed for the notice period itself? This is the harder question. Ontario and Canadian courts have generally held that a dismissed employee may be entitled to the bonus or commission they would have earned had they continued working through their notice period — unless the employment contract or the bonus/commission plan uses clear and unambiguous wording to remove that entitlement.
Because the second point turns entirely on the wording used, employers who want to limit exposure need a lawyer to review the actual clause — not just a plan summary — before it goes into a contract.
Common Drafting Mistakes
- [ ] Relying on a slide deck or email describing the bonus plan instead of contract language
- [ ] Using the word "discretionary" without describing any actual discretion exercised
- [ ] Failing to address what happens if the employee is on a leave of absence during the payout date
- [ ] Assuming a termination clause elsewhere in the contract automatically limits bonus entitlement
- [ ] Changing the bonus formula without a written amendment signed by the employee
Frequently asked questions
Can an employer simply stop paying a bonus once someone gives notice to resign?
It depends on the clause and on whether the bonus had already been earned by the time notice was given. A clearly worded, genuinely discretionary bonus program gives an employer more room than a formula-based plan the employee has already qualified for.
Does a "must be actively employed" clause always work?
Not automatically. These clauses are common, but Ontario courts have scrutinized them closely, particularly where the employee's "inactive" status resulted from the employer's own decision to terminate without cause. The specific wording matters enormously.
Should commission and bonus terms live inside the main employment contract or a separate plan document?
Either can work, but the two documents need to say the same thing and be referenced clearly in each other. A plan document that contradicts the employment contract creates ambiguity a court will resolve against the drafter.
Do these issues apply to independent contractors as well?
Contractor compensation is governed by the contractor agreement rather than the ESA, but the same drafting discipline applies — vague language about what happens on termination causes the same disputes.
This is a corporate question
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