Canada: Employers Must Exercise Fair And Reasonable Discretion In Awarding Discretionary Bonuses

Bowen v. JC Clark Ltd., 2022 ONCA 614 (CanLII)

If an employee is terminated without cause, are they entitled to discretionary bonuses? In Bowen v JC Clark Ltd,¹ two portfolio managers at JC Clark were terminated on a without-cause basis and were each given two weeks' salary plus $577 in lieu of notice. The managers commenced a wrongful termination action against JC Clark, claiming that they were owed $1.3 million in performance fees. The managers argued that this was a term of their employment for the portion of 2014 that they worked prior to their termination. The trial judge dismissed their claim, determining that they were not entitled to be paid performance fees by JC Clark. The portfolio managers appealed the trial decision.

The Ontario Court of Appeal allowed the appeal in part. While the Court of Appeal rejected the appellants' submissions in relation to their entitlement to performance fees, the Court of Appeal found that the trial judge erred in preventing the appellants from arguing their entitlement to a discretionary bonus. In determining what would be considered fair and reasonable calculation of bonuses given the factual context of the case, the Ontario Court of Appeal awarded each appellant $115,000. In making this decision, the Court of Appeal held that employers should exercise their discretion reasonably and in good faith and that the discretionary nature of performance bonuses does not bring with it unfettered discretion.

Background

The portfolio managers were first hired by a senior investment professional to manage a hedge fund that he created. The fund was sold to JC Clark in 2012 and as part of the sale, the senior investment professional agreed to allow JC Clark to hire the managers to manage the day-to-day activities of the fund. The investment professional entered into an agreement with JC Clark which provided that for four years after the fund's sale, the investment professional would receive a share of the management and performance fees earned by the fund. The investment professional then entered into side agreements with the managers where he intended to share 50% of his management fees and 100% of his performance fees with them. Subsequently, the managers entered into employment agreements with JC Clark which provided that "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."² The fund performed exceptionally well during the first half of 2014 under the managers' supervision—which was when JC Clark terminated their employment without cause.

At trial, the judge dismissed the managers' claim, finding that the investment professional had paid them the performance fees that they were entitled to for the portion of the year they worked in 2014 and that they were not entitled to the share of performance fees directly from JC Clark. In possessing this knowledge, the trial judge determined that the managers signed employment agreements which did not provide for any performance fees that would be paid by JC Clark.

The managers appealed.

Ontario Court of Appeal's Decision

The Ontario Court of Appeal allowed the appeal in part. In reviewing the employment agreements, the Court of Appeal dismissed JC Clark's argument that the discretionary nature of the bonus provision in the employment agreements meant that the employer was entirely unconstrained as to how discretion should be exercised. If an employment agreement provides for a discretionary bonus, the employment agreement contains an implied term that discretion will be exercised in a fair and reasonable manner.³

The Court of Appeal held that what constitutes a fair and reasonable exercise of discretion is dependent on the factual context of the case. The managers argued that their discretionary bonus should be calculated in comparison to two similar portfolio managers employed at JC Clark, whose fund did not perform as well as the appellants but received a greater portion of discretionary bonuses in 2014. The portfolio managers provided further evidence that in December of each calendar year, the employer considered the allocation of discretionary bonuses from a pool of funds set aside for that purpose. Distribution of discretionary bonuses was determined by a variety of factors including corporate performance, individual performance, attitude, teamwork, seniority, position within the company, and their length of employment at the company.⁴ Taking these factors into account, the Ontario Court of Appeal concluded that a fair and reasonable calculation of bonuses would involve the fund's performance and bonuses rewarded to other portfolio managers at the time. Ultimately, the Court of Appeal held that the portfolio managers were entitled to a discretionary bonus and awarded each portfolio manager $115,000 in damages.

Conclusion

This case serves as a reminder for employers that discretion should be exercised in a fair and reasonable manner, taking into account all of the factual context and objective criteria. In doing so, employers are strongly encouraged not to take an unconstrained approach that is inconsistent with exercising discretion in a fair and reasonable manner. In determining how to distribute discretionary bonuses, employers are encouraged to consider objective criteria, including individual performance, position within the company, and whether discretionary bonuses will or were awarded to similarly situated employees.

"This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs."

This blog was co-authored by student-at-law, Abby Leung

Footnotes

1. 2022 ONCA 614.

2. 2022 ONCA 614 at para 9.

3. Ibid at para 35.

4. Ibid at para 41.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.