February 2, 2005

Profit sharing and employees who resign

Question: Is an employer who normally pays profit sharing based on the previous year’s results in the subsequent year, bound to pay that amount to a person who resigns effective at the end of the preceding year?

Answer: The payment of profit sharing and bonuses to employees who resign prior to the date of payment is dependent on the nature of the payment, and any condition to it being made.

Where the bonus amount is an integral part of an employee’s compensation, and is non-discretionary in the sense that it is related to profits generally and not to the employee’s performance, the amount is considered profit sharing. Even if a bonus is discretionary in nature, if it has historically been paid each year, the bonus is likely to be considered an integral part of the employee’s compensation.

As an integral part of the compensation package, any bonus amount will be made payable despite resignation or termination in the year prior to actual payment of the bonus.

Profit sharing normally occurs after the finalization of a company’s financial statements by the auditors. If an employee who, as part of their compensation, was part of a profit-sharing program has resigned or been terminated in the fiscal year prior to the finalization of the statements, they are still entitled to their respective amount under the profit-sharing program for the fiscal year in which they resigned.

The fact they are no longer on the payroll of the company in the year in which the payment is actually made does not change the fact that they are owed their respective amount under the profit-sharing program. This, however, is only the case if the amount due under the program was an integral part of the employee’s compensation, and where no indication was made by the employer that the employee must still be an employee of the company in the fiscal year in which the payment is actually made.

An employer may wish to make a condition of continuing employment a requirement to collect their respective portion of the profit under the program. In order for such a condition to take effect against a former employee, the employer must make the condition known to the employee as a specific term of their employment.

Such a term could form part of the actual employment agreement, in which case a high level of reliance could be placed on it. However, this term could also be couched in the general policy and procedures of the employer, or in the employer’s practice history. In each of the latter situations, less reliance could be placed on the expectation of payment of the bonus, particularly if the bonus is discretionary in nature.

In short, the payment of an amount under a profit sharing scheme to an employee not on the payroll at the time of the dispersal will depend on whether the payment makes up an integral part of the employee’s compensation, and whether a condition of continuing employment is attached to the payment.

Peter Israel is the senior partner in the Toronto law firm of Israel Foulon LLP – Employment and Labour Lawyers. He can be reached at 416-640-1550 or pi@israelfoulon.com. A version of this article originally appeared in the Carswell publication, Canadian Employment Law Today

LEGAL DISCLAIMER: This article is for informational purposes only and is not intended to provide legal advice, which in all circumstances must be tailored to the specific facts of any problem. You should obtain a proper legal consultation in order to determine how this article applies to your specific situation.
Please feel free to contact Israel Foulon LLP to learn more at 416-640-1550.

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