Labor & Employment Law

Bonus Calculation on Termination in a Recession

By Michael Fitzgibbon

An issue that has arisen of late if how you calculate "bonus" on termination in a recession.

Assuming that a bonus is non-discretionary or has become non-discretionary in one way or another, Courts will often include some component of bonus through the period of reasonable notice.  They are generally called upon to assess what the employee likely would have received as a bonus had he or she remained at work through the period of reasonable notice. 

There is no science to this.  One common method is for the court to take an average of the bonus that the employee received in a number of years (say 3) preceding the termination and use that average as a basis for calculating the bonus through the period of reasonable notice.  On that theory, the past is an indicator of the future ("if you received an average bonus of $10,000 over the past 3 years, then we should expect that you will receive a bonus of $10,000 this year").

However, it seems that this analysis yields (potentially yields may be the better way of putting it) an inflated bonus calculation during a recession.  In a recession, the past may not be an indication of the future and, indeed may overcompensate an employee through an overestimation of the bonus that he or she likely would likely have received through the notice period.

If the purpose (or one of them) of the reasonable notice period is to put the employee in the position he or she would have been in had he or she remained at work through the period of reasonable notice (rather than being terminated immediately), then maybe a better indicator or predictor of future performance relative to bonus is what's happening at the time of the termination or in the more recent past rather than by taking an average which includes significant bonus income earned and paid when economic and business times were very different than they are today. 

Just a thought. 

Full post as published by Thoughts from a Management Lawyer on May 28, 2009 (boomark / email).