Author: Nofil Nadeem
Facts
The Plaintiffs were Portfolio Managers of a hedge fund (the “Fund”) under the supervision of Martin Braun, a senior investment professional. The Fund was acquired by the Defendant, JC Clark Ltd. (“JC”). As part of the acquisition, the Plaintiffs were hired by JC as Portfolio Managers. The Portfolio Managers were subject to a Combination Agreement, which provided that for four years after the sale of the Fund, Braun would receive 40% of the management fees and 40% of the performance fees earned by the Fund based on the fund’s returns. Braun told the Portfolio Managers that he would pay them 50% of the management fees and 100% of the performance fees allocated to him. The Employment Agreements also contained a discretionary bonus provision: “[a]t 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.”
The Portfolio Managers worked at JC from December 3, 2012, until July 16, 2014, when their employment was terminated without cause. At the time of their termination, the Plaintiffs were each given 2 weeks’ salary plus a “2-week pro-rata bonus” of $577. Braun remained at JC and paid his share of the 2014 performance fees to the Portfolio Managers. The Portfolio Managers sought over $1.3 million in performance fees from JC for the period they worked in 2014.
Decision
The ONCA found that the discretionary nature of the bonus provision did not mean that the employer was entirely unconstrained as to how that discretion was exercised. Copeland J.A. reasoned 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 court held that it was not a fair and reasonable exercise of the employer’s discretion to pay only $577 without paying a discretionary bonus for the period worked in 2014.
The ONCA noted that there was a significant bonus pool in 2014, based on the bonuses awarded to other Portfolio Managers. The Fund earned “jaw dropping” returns in 2014 prior to the Portfolio Managers’ termination. The court concluded that a fair and reasonable exercise of the employer’s discretion in awarding a bonus would consider:
- The returns of the Fund; and
- The bonus awarded to similarly situated portfolio managers for 2014 (pro-rated)
Based on $200,000 as the bonus paid to similarly situated portfolio managers in 2014, this amounted to $116,000. The court awarded $115,000 since the Portfolio Managers sought this amount in their submissions.
Key Takeaways
Employers must be aware that the discretionary nature of a bonus provision in an employment agreement and/or bonus plan, does not mean the employer is unconstrained in how that discretion is exercised i.e. it should not be purely subjective. Rather, to determine entitlement to a discretionary bonus in a particular year, employers should consider individual employee performance as well as whether discretionary bonuses will be awarded to similarly situated employees.