Digest of Benefit Entitlement Principles Chapter 5 - Section 14
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5.14.0 Bonuses, gratuities, and tips
A bonus is defined as something which is given in addition to what is expected or strictly due, or given in addition to an employee's usual compensation; an incentive to employees to provide efficient and faithful service. A gratuity is defined as something given voluntarily or beyond obligation, usually in return for or in anticipation of some form of service. While there is a voluntary element in both these definitions, in modern business usage the terms have broadened to include amounts that could be included in the terms of a collective agreement. In addition, bonuses and gratuities have become, in many cases, an incentive to ensure employees provide good service (production bonuses), or do something (signing bonuses). Consequently, a bonus or gratuity is not necessarily an unsolicited and unexpected gift from employer to employee. Both the terms, bonus and gratuity, are often used interchangeably in practice.
There is usually no question that bonuses and gratuities are earnings when they are paid by employers, since these amounts are clearly income arising out of employment (EIR 35(2)(a)). This is true even if the person who pays the bonus is representing the employer, such as a receiver in bankruptcy proceedings. However, gratuities that are gifts from an employer to an employee because of their personal relationship or friendship, rather than the employer-employee relationship, do not arise out of employment. The personal relationship is prompting the gift, and not the employment relationship (Digest 220.127.116.11). The giving of a wedding gift to an employee when it is not the employer's practice to do so, for example, may be more closely linked to a friendship between the employer and the employee, than to the employment relationship.
Someone other than an employer, such as a customer, may give gratuities. If a connection is established between the employment, the work performed, and the reason for the gratuitous payment, the gratuity is considered to arise out of employment. This is the case when a customer tips a server (Digest 5.14.7). However, if the gratuity given is not related to the work performed or the services provided, such as due to a personal relationship or friendship, the gratuity cannot be said to be arising out of employment. In this situation, the relationship itself prompted the payment, and not the services performed by the claimant.
The allocation of bonuses and gratuities is governed by whether the payment is more closely linked to the services performed, or to a particular event or transaction. In other words, the reason for the payment. Some specific allocation situations are as follows:
- bonuses and gratuities which have a specific link to measurable production goals and the services required to meet those goals, are allocated to the period in which those services were performed (EIR 36(4))
- bonuses and gratuities most closely linked to a holiday or non-working day are allocated to the week in which the holiday occurred (EIR 36(13))
- bonuses and gratuities paid or payable by reason of a lay-off or separation should be allocated from the date of the event, either the lay-off or the separation, which gave right to the payment (EIR 36(9); EIR 36(10))
- bonuses or gratuities to which none of the other subsections apply are allocated to the period in which the services are performed or to the week of the event or transaction (EIR 36(19))
5.14.1 Production bonuses
Production bonuses are paid when workers meet or exceed specified levels of production, sales or service. All types of industries employ these bonuses as a form of incentive to maintain or increase productivity. Production bonuses may be part of the employment contract, either by custom or by an explicit written policy or collective agreement. Production bonuses may also be paid unexpectedly because of a particularly good year. The central factor is that they are based on exceeding specific work levels, during a specific period, and performance of either the individual, or the individual's work unit.
The calculation of production bonuses may be based on a formula related to individual or group performance, during a specified period. It may be based on the hours worked, the amount of work performed, or any other measurable criteria that suits the industry, the company, the job, or the situation (FCA A-600-92, CUB 20966). It may be paid regularly as part of the employee's salary, or in a lump sum periodically or annually, as the employer is able to pay.
As production bonuses are directly related to the amount of work performed in a specified period, they are allocated as any payments made under a contract of employment for the performance of services (EIR 36(4)). This allocation should be in proportion to the amount of work performed, sales made, or service provided in each week. If they are paid with every pay cheque, or periodically on a regular basis, then they are allocated in proportion to the amount of work performed, sales made, or service provided in each week. If the amount of work performed weekly is unknown, which is often the case when production bonuses are paid annually, then the earnings should be allocated evenly over all the weeks of the period for which the bonus is being paid.
5.14.2 Shift bonuses or shift premiums
Shift bonuses or premiums, are normally small amounts paid for each hour worked on a specified shift, or they may be paid in lump sums per shift. This type of bonus is common in the mining or manufacturing sector of the economy. They are usually paid to encourage participation on evening or night shifts that may be viewed as less desirable than straight days. They are also paid as an incentive for workers to accept shift rotation in a work schedule.
Shift bonuses usually form part of the written contract of employment and therefore the exact terms and conditions of entitlement to this bonus will virtually always pre-exist the period for which they are paid. They form a basic part of the pre-established rates of wages or salary under a contract of employment for the performance of service. These moneys are allocated to the period in which the services were performed (EIR 36(4)).
5.14.3 Event bonuses
Event bonuses are paid on the occasion of certain events, such as holidays, service anniversaries, fiscal or calendar year ends, or the signing of collective agreements. These bonuses may be cash or a non-pecuniary gift like a Christmas turkey or a retirement gift (Digest 18.104.22.168). They are usually lump-sum amounts, rather than based on a formula related to the period or conditions of employment. The most common types of event bonuses are Christmas bonuses, signing bonuses, a good-year bonus, or a cash or gift given as a length of service award.
Event bonuses are usually flat, fixed lump-sum payments, with no grading in the method of calculation. They may be gratuitous, unexpected and unsolicited expressions by the employer, or there may be a custom, or even a written employer's policy, that governs their payment. In relatively rare cases, they may be included in a collective agreement, as the result of employer-employee negotiations.
Whether an event bonus is paid regularly, (for example, annually at Christmas), or is an isolated occurrence (for example, only when an employee has worked 25 years with that employer), it is paid primarily because of the event. This is the basic distinction between this type of bonus and a production bonus. Although it can be said that employers generally want to reward only good, productive employees, an event bonus lacks the specific link to measurable production goals and the services required to meet those goals. As there is no specific link to the services performed, an event bonus is allocated to the week of the event that caused the payment to be made.
If the event is a holiday or non-working day, the bonus would be allocated to the week in which that event occurred (that is, the week in which the holiday or non-working day falls) (EIR 36(13)). If there is another type of event, such as an anniversary payment in which there is only a vague and subjective reference to services (for example, 10 years of service), then the bonus is allocated to the week in which the anniversary date occurred (EIR 36(19)(b)).
22.214.171.124 Signing bonus
A signing bonus is a type of event bonus, triggered by the signing of a collective agreement. However, the terms of the collective agreement must be examined to ensure the bonus is in fact being paid for this reason. Signing bonuses are sometimes offered by the employer as a result of the employment contract negotiation process. This most commonly occurs when a collective agreement has taken some time to negotiate. The employer may agree to pay all regular employees a set amount of money in lieu of a retroactive wage increase or a set amount as an incentive to sign. The amount is often the same for all regular employees regardless of the wage, the job, the employee's position or the number of hours worked. This lump sum saves the employer the expense and trouble of calculating a wage increase for the prior period. The employer may prorate the signing bonus in some manner for part-time or temporary employees.
The language in a collective agreement may not specifically refer to signing bonuses. It is imperative that the terms and conditions of the agreement be examined to determine the real nature of the payment. More often than not, regardless of the name given to this payment, its principal purpose is as an incentive to promote the ratification of the collective agreement by the workers. These signing bonuses can usually only be paid when the contract is ratified by the membership, or signed and finalized. Often the collective agreement may contain 2 parts: the Central Agreement (part I) and local agreements (part II). In these cases, the signing bonuses do not become payable until both parts of the agreement have been ratified. Signing bonuses are considered paid by reason of an event or transaction (ratification of the contract) and are therefore allocated to the week of that event or transaction (CUB 77513).
126.96.36.199 Good-year bonus
A good-year bonus is also an event bonus. This type of bonus generally recognizes the overall productivity of the company rather than the work of an individual or of a group of workers. The good-year bonus is usually calculated at the end of the calendar or fiscal year when the books are audited, and it is known what the profitability of the company was in the previous year. The premise of a good-year bonus is that if the company had a good year, all the workers were good employees, and should share in the good fortunes of the company. If the good-year bonus can be directly linked to the amount of work performed by the individual, or by the company as a whole (for example, a percentage of the profits paid to the workers), then the bonus would be a productivity bonus, and allocated to the period in which the services were performed (EIR 36(4); Digest 5.14.1). A lump-sum payment that is not based on any formula related to the profitability of the company, or any other measurable criteria, cannot be directly related to the employee's work. Such a bonus is more related to a transaction, whether that is the finalization of the company books, or a decision to reward the employees for a good year.
Occasionally there is an extra condition of payment, such as a return to work. If a bonus would never be paid if the employee did not return to work, or if any condition for payment was not fulfilled, then the event is the fulfilment of all the required conditions. The bonus is allocated to the week of that event (for example, a return to work) (EIR 36(19)(b)).
5.14.4 End-of-season bonuses
End-of-season bonuses are paid to workers who agree to, and actually do, work for the full term of the contract period, or who complete a certain amount of work within a specified period. End-of-season bonuses are common in seasonal industries where the season is very short. The main purpose of this kind of bonus is to offer employees a strong incentive to stay with the employer until they are no longer needed and to not leave early. If an employee leaves early for any reason, voluntary or not, all or a significant portion of the bonus is usually lost. The monetary impact of not fulfilling the terms required for payment of a bonus may be a negative incentive or deterrent.
The terms and conditions for end-of-season bonuses should be known when the offer of employment is accepted. Therefore, it is an express condition of the employment and may be considered a contractual right of the employee. The amount of an end-of-season bonus may simply be a fixed lump-sum payment, it may be a type of wage increase in relation to the total number of hours or days worked, or it may relate in some manner to the work performed.
Its predominant link is to the services performed rather than to the time of payment even though an entitling condition for receipt of the bonus is that the employee completes the term of duty, and thus fulfils the terms of the contract. In other words, the end-of-season bonus is not payable until the end of the season (Digest 5.6.1).
An end-of-season bonus is compensation for the performance of services under a contract of employment. It is therefore, allocated equally or proportionately to the period in which the services are performed (EIR 36(4)).
5.14.5 Separation and retirement bonuses
Separation and retirement bonuses may be given to an employee upon the termination of employment, in recognition of years of faithful service. In other words, these bonuses would not be paid if it were not for the lay-off or separation. This would be an amount over and above other earnings that may be paid at the time of a separation from employment, such as wages in lieu of notice or severance pay.
While separation bonuses are for the purpose of recognizing and rewarding good service, the payment is not directly related to meeting or exceeding objective production goals. It is therefore not a production bonus to be allocated over the period in which the services were performed. Separation or retirement bonuses are paid or payable by reason of a lay-off or separation. They are therefore allocated from the week of the lay-off or separation, along with any other termination earnings.(EIR 36(9); EIR 36(10); Digest 5.12.4).
5.14.6 Closure bonus
A closure or loyalty bonus is usually announced as a part of a closure agreement. Typically, a condition of payment is that the worker is on staff when the closure is announced and remains working until all production or cleanup is finished. This is often referred to as a retention bonus (CUB 73014). Closure bonuses are offered as an incentive to maintain production levels, complete necessary orders for shipment before closure, or prevent sabotage during the final weeks of a company's operation. However, in any work situation, the employer normally expects that an employee will remain on the job as long as required, and any employee who quits often forfeits the right to any severance pay. Therefore, by making the payment of a closure bonus conditional upon staying, the employer is only reinforcing a normally accepted condition of employment. This type of bonus is normally paid at the time of, or just prior to, the closure date.
Employers often call these bonuses a production bonus, but the link to production is usually general and vague, with no measurable conditions of payment except that the claimant forfeits payment by leaving before the closure date (CUB 26019). If a direct relationship between the right to the money and the production levels can be established, then the bonus would be allocated over the period from the time the closure was announced to the date of closure (FCA A-600-92, CUB 20966).
Whenever a bonus is paid to employees, the reason for the payment must be examined. If the company has set no objective productivity goals except to maintain production, then the bonus, especially if paid just prior to, or at the time of the closure, is considered to be paid or payable by reason of the separation. It is then allocated with any other termination earnings, from the date of the separation (CUB 57342). The onus is on the claimant to prove that earnings paid at the time of separation are not payable by reason of that separation.
5.14.7 Gratuities from customers
Customers give workers gratuities in recognition of service provided and work performed by the worker. Gratuities may be in either pecuniary or non-pecuniary form. They are normally received directly from the customer, and may be shared by employees. A flat-rate service charge added to a customers' bill, is not considered freely given by the customer. It is an additional charge levied by the employer, and forms part of the employees' agreed upon wage compensation package under the contract of employment. The employer is charging more for a product or service, and agrees to turn the additional amount charged, over to the employees. This amount is part of the employees' compensation under the contract of employment, and is allocated to the period in which the services were performed (EIR 36(4)).
As gratuities are paid by customers to workers, in recognition of the service provided or work performed, these moneys are part of the entire income arising out of employment (EIR 35(2)). If the gratuity is given due to a personal relationship rather than for the service or work performed, it does not arise out of employment, and is not earnings for EI benefit purposes.
Gratuities from customers for services provided or work performed are allocated either to the period in which the services are performed or to the week in which the transaction is made, depending on which one is appropriate (EIR 36(19)).
If the claimant did not keep a record of the amounts and dates of the tips received, an average weekly amount may be determined based on the claimant's own experience. If this cannot be done, or if the earnings calculated are unreasonable, an assessment may be made based on what appears reasonable under the circumstances.
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