Digest of Benefit Entitlement Principles
Chapter 5 — Earnings
Table of Contents
5.14.0 Bonuses, Gratuities, and Tips
A bonus is defined as something, such as money, which is given in addition to what is expected or strictly due, or given in addition to an employee's usual compensation;Footnote 1 an inducement to employees to procure efficient and faithful serviceFootnote 2. A gratuity is defined as something given voluntarily or beyond obligation usually in return for or in anticipation of some serviceFootnote 3. While there is a voluntary element in the dictionary definitions, in modern business usage the terms have broadened to include amounts which could be included in the terms of a collective agreement. In addition, bonuses and gratuities have become in many cases, an incentive to ensure the employee provides good service, for example, production bonuses; or does something, for example, signing bonuses. Thus, the idea that a bonus or gratuity is an unsolicited and unexpected gift, from employer to employee, has been lessened. 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.Footnote 4 This is true even if the person who pays the bonus is standing in the place of the employer, such as a receiver in bankruptcy proceedings. However, gratuities which are gifts from an employer to an employee because of their personal relationship or friendship, rather than the employer-employee one, are not arising out of employment. It is the personal relationship that is prompting the payment and not the employment relationship.Footnote 5 The giving of a wedding gift to one employee when it is not the employer's practice to do so, for example, may be more closely linked to friendship between the employer and the employee than to the employment relationship.
Gratuities may be given by persons other than employers, such as customers. The gratuity is considered to be arising out of employment if a connection is established between the employment and the work performed, and the reason for the gratuitous payment. This is the case when a customer tips a waiter or waitress.Footnote 6 However, if the giving of the gratuity 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. It is the relationship itself that prompted the payment and not the services performed by the claimant.
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, what was the reason for the payment? 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.Footnote 7 Bonuses and gratuities most closely linked to a holiday or non-working day are allocated to the week in which the holiday occurred.Footnote 8 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.Footnote 9 Lastly, 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.Footnote 10
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 for a particularly good year. The central factor is that they are based on the exceeding of specific work levels in specific periods of time 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 of time. It may be based on the hours worked, or the amount of work performed, or any other measurable criteria that suits the industry, the company, the job or the situation.Footnote 11 It may be paid regularly as part of the employee's salary or it may be paid 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 servicesFootnote 12. 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 or 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 also viewed as less desirable to work 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 performedFootnote 13.
5.14.3 Event Bonuses
Event bonuses are paid upon 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 the Christmas turkey or the retirement gold watchFootnote 14. They are usually lump-sum amounts, rather than based on some formula related to the period or conditions of employment. The most common types of event bonuses are the Christmas bonus, the signing bonus, the good-year bonus and the cash or gift given for a lengthy period of service.
Event bonuses are usually flat, fixed lump-sum payments with no grading in the method of calculation if there is such a method. They may be gratuitous, unexpected and unsolicited expressions by the employer, or there may well exist a strong custom or even a written employer's policy that governs their payment. In relatively rare cases, they may be found in a collective agreement as the result of the 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. While 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 appropriately 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 fallsFootnote 15. If there is another type of event, such as an anniversary payment in which there is only a vague and subjective (ten years service) reference to services, then the bonus would be allocated to the week in which the anniversary date occurredFootnote 16.
Signing bonuses are sometimes offered by the employer in 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 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. Even when prorated, these signing bonuses can usually only be paid when the contract is ratified by the membership or signed and finalizedFootnote 17. Signing bonuses are payable by reason of an event or transaction and are allocated to the week of that event or transaction.
The 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-end when the books are audited and it is known what the profitability of the company in the previous year was. It is assumed 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 related to the amount of work performed by the individual or by the company as a whole, such as when a percentage of the profits are paid to the workers, then the bonus would be a productivity bonus and allocated to the period in which the services were performedFootnote 18. A lump-sum payment which 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 correctly considered 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 could never be paid if the employee did not return to work, or whatever 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 transaction, for example, a return to workFootnote 19.
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 usually within a specified period of time. End-of-season bonuses are common in seasonal industries where the season is very short. The prime purpose of this kind of bonus is to offer employees a strong incentive to stay for the full period they are needed and not to leave early. If an employee leaves early for any reason, voluntary or not, all or a significant portion of the bonus is usually lost. A penalty imposed for not fulfilling the terms required for payment of a bonus is a negative form of incentive.
The terms and conditions for end-of-season bonuses are always known when the offer of employment is accepted. Therefore it is an express condition of the employment and may be considered a contractual right. The amount of an end-of-season bonus may simply be a fixed lump-sum payment, or may be a type of wage increase tied to the total number of hours or days worked, or 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 seasonFootnote 20.
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 performedFootnote 21.
5.14.5 Separation and Retirement Bonuses
Separation and retirement bonuses are generally given to an employee, upon the termination of employment, in recognition of long years of faithful service. In other words, these bonuses would never be paid if it were not for the lay-off or separation. They are usually paid as 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 purport to recognize and reward good service, the payment is only vaguely 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 and as such are allocated, along with any other termination earnings, from the week of the lay-off or separation.Footnote 22
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 clean up is finished. Closure bonuses are offered as an incentive to maintain production levels, complete necessary orders for shipment before closure and 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 dateFootnote 23. 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 closureFootnote 24.
Whenever earnings are paid to an employee 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 can be assumed to be paid or payable by reason of the separation and allocated with other termination earnings from the date of the separationFootnote 25. 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
Gratuities are given by customers to workers in recognition of the service provided and the work performed by the worker. Gratuities may be in either pecuniary or non-pecuniary form. Gratuities are generally received directly from the customer and may be shared by employees. A flat rate service charge added to a customers' bill is not 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 the product or service and agrees to turn the billed service charge amount 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 performedFootnote 26.
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 employmentFootnote 27. If the gratuity is related to a personal relationship rather than the service or the work performed, it cannot be said to be arising out of employment and is not earnings for benefit purposes.
Gratuities from customers for services provided or work performed are allocated either to the period in which the services are performedFootnote 28 or to the week in which the transaction is madeFootnote 29, depending on which one is appropriate.
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 past experience. If this can not be done or if the earnings so calculated are unreasonable, an assessment may be made based on what appears reasonable under the circumstances.
- Footnote 1
Webster's Ninth New Collegiate Dictionary;
- Footnote 2
Black's Law Dictionary, Sixth Edition;
- Footnote 3
Webster's Ninth New Collegiate Dictionary;
- Footnote 4
- Footnote 5
- Footnote 6
- Footnote 7
- Footnote 8
- Footnote 9
- Footnote 10
- Footnote 11
- Footnote 12
- Footnote 13
- Footnote 14
a value will have to determined for non-pecuniary gifts; see 184.108.40.206, "Non-Pecuniary Income";
- Footnote 15
- Footnote 16
- Footnote 17
- Footnote 18
- Footnote 19
- Footnote 20
- Footnote 21
- Footnote 22
- Footnote 23
- Footnote 24
- Footnote 25
- Footnote 26
- Footnote 27
- Footnote 28
- Footnote 29
- Date modified: