An employer’s discretion is constrained when deciding whether to award discretionary bonuses, according to the Court of Appeal for Ontario.
This may come as a surprise to many employers, who tend to regard their discretion as absolute when it comes to bonus season. However, in the case of Bowen v. JC Clark Ltd., the province’s top court confirmed that discretion must be exercised in a “fair and reasonable manner” as it allowed the claims of two terminated employees.
Facts of the case
The two plaintiffs in the case had spent more than a decade as employees of a hedge fund, rising to portfolio managers before their termination in 2014, two years after the fund’s acquisition by a large asset management firm.
Following the hedge fund’s sale, each of the plaintiffs had two additional potential sources of income on top of their base salary each year: a share of performance fees paid at the direction of their old boss; and a discretionary bonus paid by the new owners, described in their employment agreement as follows:
“At the total discretion of the Company, you may be eligible for a bonus at the end of each fiscal year depending on factors that include your personal performance and the profitability of the Company.”
In 2013, each plaintiff received $24,000 in performance fees and a further $15,000 discretionary bonus. 2014 proved a mixed year for the plaintiffs, as the fund’s returns — described by a senior executive as “jaw-dropping” — resulted in a $358,000 performance-fee payment. However, in July of that year, the firm terminated them both without cause, paying each just $577 in discretionary bonuses, pro-rated to cover their two-week notice period.
Soon after, the plaintiffs sued the company, claiming more than $1 million in allegedly owed performance fees and bonus money.
Decisions at trial, appeal
At trial, the judge dismissed the performance fee claim, finding that the portfolio managers were not owed any additional payments from the company, other than the ones directed by their former boss — which they had already received.
When it came to the discretionary bonus, the trial judge did not actually address the merits of the plaintiffs’ claim, but barred them from arguing their entitlement after finding that the issue had been insufficiently pleaded or identified as an issue at trial.
On appeal, the unanimous three-judge panel upheld the trial judge’s findings on the performance fees, but concluded that she had erred in refusing to hear the fired portfolio managers’ arguments on the discretionary bonus.
Performing their own assessment, the appeal court judges rejected the company’s arguments that they were entirely unconstrained in the exercise of the “total discretion” over bonuses described in the employment agreement.
“Where an employment agreement provides for a discretionary bonus, there is an implied term that the discretion will be exercised in a fair and reasonable manner,” the decision reads.
Paying the portfolio managers $577 each for a two-week period and nothing for the other seven months they worked during 2014 “was not a fair and reasonable exercise of the employer’s discretion in all of the circumstances,” the panel added.
In light of evidence that discretionary bonuses were paid on corporate and individual performance, the appeal court was satisfied that a fair and reasonable exercise of the employer’s discretion would have resulted in a bonus to the plaintiffs in the same range as two similarly situated employees they had identified: two separate portfolio managers who had each received around $200,000, despite working on funds that had not performed as well as the one managed by the plaintiffs.
Pro-rating for the seven months each spent at the firm in 2014, the appeal court awarded each of the plaintiffs $115,000.
Takeaways for employers, employees
On a plain reading of contractual provisions like the one at issue here, it’s easy to understand why so many employers mistakenly believe that they are protected, regardless of their actions on discretionary bonuses.
Still, whatever the wording in their employment contracts, “total discretion” over bonuses is not a licence for employers to behave in an arbitrary manner. As the Court of Appeal reminds us, discretion must be exercised in a fair and reasonable way.
By the same token, employees should not assume that they are stuck with an unfairly small bonus on termination, just because it was awarded at their employer’s discretion.In my view, one of the keys to the employees’ success in this case was their ability to point to other examples of discretionary bonuses paid to comparable employees, and employers could find they have a tougher task justifying disproportionately small payments to similarly situated workers in future.
