How to Write a Bonus Cancellation Letter (Example Included)
February 19, 2025 written by Cynthia Orduña
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When times are tough, businesses must find a way to decrease their spending, and the first thing to be cut is often annual employee bonuses. While it’s never easy to break the news to employees that they won’t be receiving the bonus they expect every year, it can be a valuable strategy to help the company hit its goals without resorting to more drastic measures and reduction events such as furloughs or layoffs.
To help with this process, businesses should have templates ready for all necessary documents and communication to help ensure the process goes over smoothly. This is where a bonus cancellation letter comes into play. Usually, letters like these are emailed to staff members, alerting them of the impending change. Employees need to know about these issues well in advance so that they can plan their finances accordingly. If you don’t properly alert your staff that their bonuses have been canceled, you’ll be setting yourself up for a lot of trouble.
By using a great bonus cancellation letter template, HR leaders and managers can be ready in the event that they ever need to implement this cost-cutting strategy. Instead of trying to write every individual performance bonus cancellation notice ad-hoc, having a template ready ahead of time can save a lot of headaches and stress in the heat of the moment.
In this article, we will show you how to write a bonus cancellation letter, including what your own letter template should include and an employee bonus cancellation letter example.
Bonus Cancellation Letter Example
Let’s start with an example of a clear and thorough bonus termination letter format to give you an idea of what your letter should entail. Below is an employee bonus cancellation letter example that you can customize for your own organization.
| COPYABLE EXAMPLE:
[Date] Subject: Bonus Cancellation for [insert year] Dear [Recipient Name]: As you may know, [Company Name] has been experiencing financial difficulties for the last several months due to [insert reason(s) here]. In the past year, we have taken action to adapt to these new challenges. Unfortunately, this action has not resulted in increased profitability and [Company Name] has not been able to meet its goals. This has left us with a big decision about how we can get back on track. Over the past month, we have faced the difficult decision of either reducing our staff headcount or exploring other areas of cost reduction so that our employees do not have to lose their jobs. After careful consideration, we have decided that the best course of action for our organization is to eliminate our annual bonuses for each of our employees this year. As you know, this is the first year that [Company Name] will not give out bonus checks. We hope that, with your continued support and hard work, we will be able to return to our yearly bonus system next year. If you have any questions, feel free to contact [insert Contact Name] at [insert telephone number/email address], who is available to answer any questions you may have regarding this bonus cancellation. Please don’t hesitate to reach out if you have any thoughts or concerns. We appreciate all of the good work you have done for [Company Name] and are hopeful that next year will be prosperous, enabling us to reinstate our bonus policy and show our gratitude for all of your hard work, dedication, and loyalty as we continue to strive toward long-term business success. Sincerely, [Signature of CEO or Organization Representative] |
Feel free to copy and customize this employee bonus cancellation letter example to craft your own template. However, please note that this example is for demonstration purposes only and does not constitute legal advice. Always consult with your own legal and HR departments to ensure that you are including all necessary language and complying with all local, state, and federal laws.
It’s also important to make sure you’ve considered all of your options and identified the most effective downsizing strategies that will have the least impact on your employees and company brand. Click below to download our free reduction resources guide to implement the right cost reduction strategy for your organization.
What Should Be Included in a Bonus Cancellation Letter?
Now let’s break down this employee bonus cancellation letter example into its key components and what you’ll need to include as you compose your own letter template for employees. Remember, this is just one example to give you a sense of how the letter should flow. You can take this example letter and mold it to your corporate culture.
The good news is that these letters—whether a layoff letter, furlough letter, or salary reduction letter—all work in very similar ways. There are a few elements that are essential to ensure that your letter is as thorough and thoughtful as possible.
Here are the five key components to include in your bonus cancellation letter:
1. Date and Addressee
This information is a given. It’s important to note who the recipient of the bonus cancellation letter is, as well as how and when they have received it.
2. Reason for the Bonus Cancellation
Explain to the employee why the company’s goals were not met and the thought process behind why they will be canceling bonus checks this year. This first section sets the tone, so you need to get right to the point while also explaining that it could be worse. Most employees will be more open to their bonuses being canceled if they understand the alternatives.
3. Details and Expectations
Give more details on the timing for canceling the annual bonuses, including if it will be a one-time move, to be as transparent as possible and set expectations. You shouldn’t try to hide anything in this letter. Not only would that hinder the bonus cancellation process, but it could also foster employee distrust and the spread of misinformation.
For example, you could explain that this is a one-time move and that you hope to reinstate bonuses next year when finances even out. This part of the letter should be hopeful, but not untruthful or misleading.
4. How Employees Can Ask Questions
Explain where employees can reach out if they have questions. For example, you could offer to meet with any concerned staff members. The point of the letter is to be informative, but some employees are bound to have questions. Again, this will help negate the downsides of a move like this, and guard against the spread of misinformation and negative rumors.
5. A Thank You for Their Contributions
End the letter on a positive note by acknowledging the employee’s role and value to the company. You can otherwise sign off like you would with any other employee letter.
What Are the Legal Implications of Canceling a Bonus?
Before you decide to move forward with your letter for canceling bonus payments, let’s go over a few legal implications to consider.
1. Contractual Obligations
- Employment contracts: If the bonus is explicitly guaranteed in an employment contract, canceling it could be a breach of contract, leading to potential lawsuits.
- Offer letters and policies: If the company has stated in offer letters, handbooks, or internal policies that employees are entitled to the bonus, revoking it could expose the company to legal challenges.
2. Wage and Hour Laws
- Earned bonuses: If employees have already met the criteria for receiving a bonus (e.g., performance metrics, tenure), the bonus may be considered earned wages, and canceling it might violate labor laws.
- Discretionary bonuses: If the bonus is explicitly stated as discretionary and subject to change, the company has more legal flexibility to cancel it.
3. Employment and Labor Laws
- State laws: Some states have stricter wage laws that might protect employees from sudden bonus cancellations. For example, California has strict wage protections that could classify a promised bonus as wages owed.
Given the legal and financial risks involved, organizations should consult with both their HR department and qualified legal counsel before proceeding. Proper legal guidance ensures that the bonus cancellation is communicated correctly and in compliance with all applicable laws.
Bonus Cancellation Letter: Key Takeaways
Canceling employee bonuses is a difficult but sometimes necessary decision to keep a business financially stable. Handling this situation with transparency, empathy, and legal awareness is crucial to maintaining employee trust and minimizing negative repercussions. By knowing how to write a bonus cancellation letter that’s well-crafted and thorough, organizations can communicate this change professionally and effectively.
Here are the key takeaways:
- Ensure that the cancellation complies with contractual agreements, state laws, and wage regulations.
- Include key elements in your letter, such as a clear explanation of the reason for bonus cancellation, realistic expectations for the future, and an avenue for employee questions.
- Offer employees a point of contact for their concerns to prevent misinformation and mistrust.
- Acknowledge employees’ contributions to reinforce morale and engagement.
- Before finalizing and sending your bonus cancellation letter, consult with HR and legal counsel to ensure compliance with employment laws and contractual obligations.
At Careerminds, we believe that you can never be too prepared for your next cost reduction event. Our arsenal of resources, templates, guides, and industry-leading outplacement services can help you navigate the delicate reduction process. Click below to speak with one of our experts and see if we are the right partner for your organization.
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