Given the importance of the annual bonus to so many, it may seem surprising that such an important decision can sometimes feel arbitrary and one-sided.

The basis of the confusion is clear. If you read your average employment contract, the “right” to a bonus is tightly circumscribed with qualifications and conditions. The bonus, if any, is not guaranteed and will be calculated and granted, if at all, by the employer in its sole and absolute discretion in the words of many such clauses.

Discretion respecting bonuses is just one of several key terms drafted in language, which appears to grant employers the right to do whatever they please. Probationary terms, workplace policies, temporary layoffs, various forms of discipline are all often permitted at the employer’s “discretion.”

It is clear why employers would want such language. Employees, for their part, or at least those who actually read the contract before signing, probably feel instinctive discomfort but, in the end, sign regardless because they need the job. 

Does an employer really have “sole and absolute discretion” to make such important decisions?

The short answer is “no.” Even though it might be clearly written in the contract that both employer and employee read and signed, employers do not possess “absolute” discretion in the literal sense of the word.

Canadian courts have repeatedly held that a discretionary right set out in a contract must still be exercised in a reasonable and good faith manner. Even if the contract is completely silent about this, such an implied term will be understood to be a part of the deal that was made.

The decision of the Supreme Court of Canada this year in the Wastech Services Ltd. case made clear that all contractual discretion must be exercised in good faith and cannot be exercised arbitrarily.

What counts as reasonable and in good faith will depend on the circumstances, but it basically means that an employer must make decisions fairly and consistent with the reason for which they were granted the discretion in the first place.

To be clear, employers are allowed to make important decisions without the input of employees. It would be a fool’s errand to try to draft a contract that considers every possible scenario. Therefore, the law recognizes that it is inevitable and necessary that employers require some flexibility to operate a workplace. This includes unilaterally making decisions.

It is thus important to understand that phrases such as “at the employer’s discretion” do have meaning and are relevant to the interpretation of a contract.  But it is equally important to remember that this does not mean total freedom or absence of responsibility for the employer.

A company may legitimately decide to pay only a small bonus, or not pay any at all, following a year of bad business or a genuinely poor performance by an employee.

It would not be appropriate for a company to refuse to give a bonus because the CEO finds a specific employee annoying, or to create the chimera of unprofitability. 

In a similar vein, employees must be provided a fair opportunity to demonstrate their suitability for the role during their probationary term.

A court would be suspicious of a company that aggressively recruited an individual, fed them positive performance reviews and encouragement, then abruptly terminated their employment the day before the probationary term ended for no apparent reason. It could potentially be justified, but that company would be well-served to have clear records that the employee failed or refused to improve as objective proof.

The same principles apply wherever an employment contract refers to the employer’s discretion to do something.

You may now be thinking, in light of this, what should employees expect then?

Both employers and employees would be better off asking themselves, when they prepare a new contract: what do they actually wish to happen?

If bonuses are based on some objective achievement, like a certain number of sales made, hours worked, or company seniority, put that in. If it will be based on a formal performance review, put that in as well.

Secret plans, mysterious packages and big surprises are all fun and enjoyable components of your holiday and family traditions. Do not take the same approach to your work.

Howard Levitt is senior partner of Levitt Sheikh, employment and labour lawyers with offices in Toronto and Hamilton. He practices employment law in eight provinces. He is the author of six books including the Law of Dismissal in Canada. Michael VanderMeer is with Levitt Sheikh.