Some employment contracts provide for the possibility of discretionary bonuses in addition to the base salary. While there is no guarantee that such a bonus will be paid each year, employers are under certain constraints when issuing bonuses.

This article takes a looks at the limits imposed on the discretion of employers in the granting of discretionary bonuses. We also look at a recent decision of the Court of Appeal for Ontario in which two employees terminated without cause challenged their employer’s decision to refuse to pay a bonus for the year of their termination. 

The payment of a bonus upon termination

Employees who earn non-salary compensation, such as bonuses, are entitled to receive this compensation within reasonable notice unless their contract specifies otherwise.

The employer may present the employee with a termination package after informing them of their termination. This may cover the minimum statutory requirements while overlooking other matters, such as non-salary compensation. Before accepting a termination package that attempts to limit or remove entitlement to non-salary compensation, it is essential to review the package and the employment contract with an experienced employment lawyer.

Employers are not entirely unconstrained when deciding on discretionary bonuses

Where an employment contract provides a discretionary bonus, there is an implied term that the discretion will be exercised fairly and reasonably. 

In other words, just because a bonus is awarded at the sole discretion of an employer does not mean that it can be done arbitrarily or unfairly or that the employer can decide that an employee should not get a bonus without following a fair, identifiable process. While the employer may adjust the weight given to various factors, given the market conditions and other changeable criteria, that does not obviate the requirement that the exercise must be done in a fair manner. 

Employees went with the sale of a hedge fund and worked for the new owner

In Bowen v JC Clark Ltd., the two plaintiff employees managed a hedge fund that the employer acquired in December 2012. They were hired in 2003 by the creator of the fund, who later sold it to the employer.

The fund’s creator also joined the employer. as part of the sale. He signed an agreement that gave him a 40 per cent share of the management fees and 40 per cent share of the performance fees earned by the fund for four years after the sale. The agreement also required the employer to employ the two plaintiffs on a base salary along with “the potential (but not a guarantee) of [the employees] to be part of a discretionary bonus pool established by [the employer]” and such portions of the fees paid to the creator as determined by him.

The two plaintiffs entered employment agreements on these terms. They agreed in side agreements with the creator that he would pay them 50% of his management fees and 100% of his performance fees.

They were terminated without cause and claimed performance fees and bonus

In December 2013, each plaintiff received a discretionary bonus of $15,000 from the employer and performance fees of $24,000 from the fund’s creator.

In the first half of 2014, the fund performed exceptionally well. However, after a breakdown in the relationship, the employer terminated the plaintiffs without cause in July 2014. The plaintiffs received two weeks’ salary and a “2-week pro-rata bonus” of $577 from the employer and $358,000 each from the creator, representing his 40 per cent share of the 2014 performance fees.

The plaintiffs sued the employer for performance fees and bonuses for the portion of 2014 that they worked before their termination. 

Court found no entitlement to performance fees

The Court of Appeal decided that the plaintiffs were not entitled to performance fees as an implied term of their employment contracts beyond the share already provided for in the side agreements with the fund’s creator. 

In the circumstances known to the parties at the time, a plain reading of the employment contracts signed by the plaintiffs revealed that the employer did not owe the performance fees. The plaintiffs were only entitled to be paid performance fees through the creator.

However, the employees were entitled to discretionary bonuses

The Court of Appeal explained that the issue was whether a fair and reasonable exercise of the discretion in the employment agreements would result in the plaintiffs being awarded a discretionary bonus for the period they worked in 2014 plus the two-week notice period.

The Court decided that giving no discretionary bonus for the period from January to July 2014 and $577 for the two-week notice period was not a fair and reasonable exercise of the employer’s discretion in all of the circumstances.

The evidence showed a significant bonus pool in 2014, with bonuses awarded based on corporate and individual performance and “jaw-dropping” returns on the plaintiffs’ fund. The Court agreed with the plaintiffs that a fair and reasonable exercise of the discretion would see their bonuses based on the amounts paid to two similarly situated portfolio managers employed by the employer, pro-rated for the seven months that they worked in 2014, including the two-week notice period. 

As a result, the Court of Appeal awarded damages to each plaintiff of $115,000 for the discretionary bonus to which each was entitled. 

Contact Haynes Law Firm in Toronto for Guidance on Termination and Termination Packages

At Haynes Law Firm, we work with employees to ensure they receive maximum compensation upon termination. We ensure our employee clients leave nothing on the table when negotiating the terms of their dismissal so they have the resources they need while they seek new employment. Haynes Law Firm also works with employers across the country to limit their exposure to legal claims stemming from poorly executed terminations. To discuss how our employment law team can assist you, please contact us online or by phone at 416.593.2731.