Howard Levitt: Taylor Swift doled out millions in bonuses last year. Should her tour crew expect the same this year?

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By Howard Levitt and Lavan Narenthiran

Toronto has been taken over by Swifties as Taylor Swift‘s highly anticipated Eras tour touched down this past week. The tour has significantly boosted the local economy, and?the city?even named a route through downtown “Taylor Swift Way” by way of welcome.

Swift made headlines last year by distributing more than $55 million in bonuses to her tour crew, dancers, and drivers as a surprise gesture of gratitude. Those same employees might be wondering if they can expect a similar bonus this year. Swift’s actions raise questions about employer obligations around bonuses,?and whether employers are required to offer them every year or whether they truly are discretionary.

Discretionary bonuses and Swift’s generosity

Swift’s decision to reward her employees appears to have been a one-time, voluntary gesture rather than an expectation. This is a clear example of a discretionary bonus, where an employer gives a reward at its discretion based on performance, profitability or sheer whim. Discretionary bonuses provide employers flexibility, allowing them to incentivize performance when financially feasible, and adapt bonuses to changing company needs.

However, under Canadian law, employers do not have unfettered discretion. Under certain circumstances, even “discretionary” bonuses can become an “implied term” of employment, and employees may develop an expectation to receive them consistently with a corresponding legal entitlement to the same.

Discretionary vs. non-discretionary bonuses

A non-discretionary bonus is based on clearly defined terms in the employment contract or bonus plan. It often ties to specific, measurable goals of the employee and the corporation — such as the company’s bottom line, or the individual’s sales targets or performance metrics — and is predictable for employees, providing a tangible incentive for productivity. While it is less flexible for employers, a well-structured non-discretionary bonus can be financially manageable by linking payout to company performance so that the employer knows that it will pay predetermined benefits before having to pay out the bonus.

Discretionary bonuses, like those given by Swift, permit employers to decide when and how much to award, sometimes based on overall business performance or employee achievements but without any fixed formula or criteria. However, Ontario courts have ruled that if a discretionary bonus is provided consistently, it can eventually become an implied obligation. If, for example, an employee receives a discretionary $10,000 bonus each December for five years, they become legally entitled to this amount if the employer suddenly withholds it. More commonly, if an employer provides a bonus whenever it has a good year and/or when the employee performs well, even if the amount varies, the court will extrapolate what a reasonable payment should be if none at all or too small an amount is awarded.

This shift in expectation also affects departed employees. Even when a contract or bonus plan appears on its face to disentitle an employee to any bonus payout following the cessation of their employment, employers could still be on the hook for bonuses if a departed employee sues for wrongful dismissal. Employers should consult an employment lawyer to review or draft provisions regarding any form of incentive pay to ensure that they are enforceable and limit their liability to potentially litigious departed employees.

Takeaways for both employees and employers

Employees should understand that, even when labelled “discretionary,” employers are still expected to act fairly and reasonably in awarding bonuses. Employees who feel unfairly denied a bonus may request an explanation, and if they believe the decision process was arbitrary or inconsistent with their contractual rights and the employer’s past practice, they should seek legal advice to understand their rights.

Taylor Swift’s generous bonus payouts may serve as an example for many employers but also highlight the importance of clarity in bonus structures. Employers must carefully weigh the flexibility of discretionary bonuses against the predictability of non-discretionary ones, choosing the option that best aligns with their intent and operational needs. In any event, they should consult an employment lawyer to understand and properly implement whichever option works best for them. A well drafted bonus plan in an employment contract can assist employers in effectively managing employee bonuses while also limiting employees’?entitlements upon termination and avoid unnecessary lawsuits.

Howard Levitt is senior partner of Levitt LLP, employment and labour lawyers with offices in Ontario, Alberta and British Columbia. He practices employment law in eight provinces and is the author of six books, including the Law of Dismissal in Canada. Lavan Narenthiran is an associate at Levitt LLP.