Understanding Year-End Bonuses in Ontario: What Employers Need to Know

As the year wraps up, many Ontario employers look to reward employees for their contributions with a year-end bonus. While bonuses can be a powerful way to recognize and retain talent, they can also create confusion — especially when it comes to understanding the difference between discretionary and non-discretionary bonuses.

Here’s what every employer should know before writing those bonus cheques.

🎁 Discretionary vs. Non-Discretionary Bonuses

Discretionary Bonuses

These are bonuses given entirely at the employer’s discretion — for example, a holiday bonus or a one-time recognition of strong performance. There’s no pre-set formula or obligation to pay, and employees don’t have a contractual right to receive one.

• Example: “We’re giving everyone a $500 year-end bonus to thank you for a great year.”
• Key point: Since these are not guaranteed, they’re typically not considered part of an employee’s regular wages or entitlements on termination.

Non-Discretionary Bonuses

These are tied to specific performance metrics or contractual terms. They’re typically promised in advance and earned when certain targets are met — such as sales goals, company performance, or individual KPIs.

• Example: “Employees who achieve 110% of their sales target will receive a 10% performance bonus.”
• Key point: These are considered part of an employee’s compensation and must be included in calculations for vacation pay, public holiday pay, and termination entitlements.

🧾 Employer Tips for Managing Bonuses

1. Be Clear in Your Policies and Contracts
   Clearly outline the type of bonus and eligibility criteria in your employment contracts or incentive plan. Ambiguity can lead to disputes about entitlement, especially when an employee leaves before the bonus is paid.  We strongly recommend you obtain legal advice.
2. Communicate Early and Often
   Set expectations with your team before year-end about how bonuses are determined — whether based on company performance, individual results, or discretionary factors. Transparency builds trust and reduces misunderstandings.
3. Consider Timing and Entitlement
   If bonuses are tied to the calendar year, decide when they will be able to be paid out and communicate this in advance.  Entitlement factors for employees on probation, on leave, or those who have resigned need to be clearly outlined in a policy and in the employment contract, in accordance with the employment standards of your jurisdiction.
4. Plan for Tax Implications
   Bonuses are considered taxable income in Canada, so employers must make the appropriate deductions (income tax, CPP, EI). Employees often appreciate a heads-up about how much will actually show up in their pay.
5. Review Bonus Language at Termination
   Recent court decisions in Ontario have reinforced that if a bonus is part of an employee’s regular compensation and the contract isn’t explicit about forfeiture, the employee may still be entitled to a pro-rated or full bonus even after termination.

💡 Final Thoughts

Bonuses are a great way to show appreciation and drive performance — but clarity and consistency are key. Taking the time to define your bonus structure and communicate it well can protect your organization legally and strengthen employee engagement.

If you’re unsure whether your current bonus program is structured properly or compliant with employment standards, contact us at Link HR Inc. or consult with your legal counsel.

Need Support With Bonus Policies or Year-End HR Planning?

LinkHR Inc. provides HR consulting, policy development, and compliance support for small and medium-sized employers across Ontario and Canada. Our team helps businesses design clear bonus structures, update employment contracts, and ensure alignment with provincial employment standards.

Whether you need help with performance management, compensation strategy, employee engagement, or policy modernization, our HR consultants can provide guidance and hands-on support.

📅 Book a free 30-minute HR consultation to review your policies or bonus plans:
✉️  linkhr.ca | 📞 (416) 565-9876 | 📍 Serving Toronto, Markham, York Region & virtual clients across Canada