Discretionary Bonuses and Termination

November 28, 2022

By Brian Babcock

THE ISSUE

Are discretionary bonuses to terminated employees truly discretionary?

THE CASE

This was one of the two issues facing the Ontario Court of Appeal in the recent decision Bowen v. JC Clark Ltd., and is the issue that is more likely to affect most of our readers.

This case involved the dismissal of two mutual fund managers who under their written contracts of employment were entitled to annual discretionary bonuses. They were terminated in July and the bonuses were typically calculated at the end of the calendar year based upon calendar year results.

The dismissed employees argued that they also should be entitled to a pro rated performance bonus as their fund had done extremely well that year. On their math, the performance bonuses would be $1.3 million.

The facts of this case were somewhat unusual regarding the performance bonuses. The dismissed employees had been employed by the current employer since it had purchased management of the funds from the dismissed employees’ former employer. The key man, MB, who had operated the funds prior to the sale also transferred to the new employer, and the dismissed employees had continued to work under his supervision.

Although the performance bonuses were not part of their employment contracts, they were paid under an arrangement with MB who shared his performance bonuses with the Plaintiffs. Both the trial judge and the Court of Appeal said that the employees’ side deal with MB did not obligate the current employer to pay them a share of the performance bonus owing to MB.

The more common and more interesting part of the decision deals with the discretionary bonuses. The employer took the position that their discretion was unconstrained – that is that they could award any amount or no amount as they wished.

Discretionary bonuses were typically awarded based upon a combination of corporate and individual performance. In the year of dismissal, the employer had allocated a significant amount to pay discretionary bonuses because the funds had done extremely well.

The Court of Appeal agreed with the employees that the discretion must be exercised in a fair and reasonable manner. The Court ordered that a discretionary bonus be added to the termination pay of the two employees based upon the amount of bonuses paid to two similarly situated employees.

Although the pro-rata discretionary bonuses of $115,000 each were small compared to the amounts sought for the performance bonus, they were a significant amount in absolute terms.

TAKEAWAYS

  • The availability of bonus payments as part of the termination pay for employees dismissed without cause will vary depending upon the terms of their employment contracts.
  • Where the contract is silent but bonuses have been paid, the courts may look at past practice to imply a term of the contract.
  • Where the employment agreement either expressly or impliedly provides for a discretionary bonus, that discretion must be exercised in a fair and reasonable manner.
  • Each fact situation will depend upon its own particular facts both in terms of the written agreement and the course of conduct.
  • As a result, both the employer and the employee ought to seek independent legal advice with respect to entitlements to ensure that the amount offered or agreed upon reflects recent trends in what is considered to be fair and reasonable.
  • Courts are reluctant to imply a bonus clause which imposes an obligation on an employer that goes beyond the actual terms of the employment contract. These situations also will be very fact specific.
  • Unlike in many other situations, the courts will not necessarily favour the employees in determining whether an additional bonus is to be implied.
  • One possible interpretation of this is that the courts will be reluctant to imply a new right, but where a right exists whether through conduct or in writing, the courts will bend in favour of employees to make that right meaningful and ensure that the employees receive some form of payment.
  • It is significant in this case that the employees were dismissed without cause which would make their position much more sympathetic in the eyes of a court.
  • The facts of this case may also have influenced the result in that the company had been extremely successful and the refusal to pay a bonus would make them appear unreasonable.

HOW WEILERS LLP CAN HELP YOU

The employment law group at Weilers LLP provides a comprehensive service from drafting employment contracts, to advising on dismissals and severance packages, to mediating, arbitrating, or litigating employment disputes. If you want advice tailored to Northwestern Ontario from lawyers based in Thunder Bay, Weilers LLP may be the right lawyers for you.