In the normal course of employment, many employees receive bonuses, whether seasonal or in response to company success, on top to their salaries. If an employee is terminated without cause, are they entitled to a bonus as a portion of their severance package or through a court claim?

A recent decision of the Court of Appeal for Ontario in Bowen v. JC Clark Ltd involved hedge fund managers who argued that they were entitled to performance fees and discretionary bonuses after being terminated without cause.

Hedge fund sold; portfolio managers work for the new owner

The hedge fund manager plaintiffs were hired by a senior investment professional to manage a hedge fund that he created. The investment professional later sold the fund to the defendant employer. As part of the sale, the investment professional agreed to remain on the team and manage the investor-client relationships. At his request, the defendant agreed to hire the plaintiffs to manage the day-to-day activities of the fund.

An agreement between the investment professional and the defendant provided the investment professional with a share of the management fees and performance fees earned by the fund for four years after the sale. It gave him the discretion to share these fees with the plaintiffs so he entered into side agreements with the plaintiffs in which he formalized his intention to share 50% of his management fees and 100% of his performance fees with them.

The plaintiffs subsequently entered employment agreements with the defendant. These agreements provided a base salary of $100,000 and stated “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.”

Plaintiffs were terminated after fund “performed exceptionally well”

In December 2013, each of the plaintiffs received a discretionary bonus of $15,000 from the defendant. The investment professional also distributed $24,000 to each plaintiff from his share of the performance fees. The fund performed exceptionally well in the first half of 2014, however, the defendant terminated the plaintiffs without cause in July 2014 after their relationship deteriorated. The defendant paid each plaintiff two weeks’ salary plus $577, which was a pro-rated bonus amount for the two-week notice period. This sum was based on the amount of the 2013 bonus. In addition, the investment professional paid each plaintiff $358,000, representing his entire share of the 2014 performance fees.

Plaintiffs sued for 2014 performance fees and discretionary bonus

The plaintiffs commenced an action against the defendant seeking over $1.3 million in performance fees, in addition to a discretionary bonus, that they claim they were owed as an implied term of their employment agreements for the portion of 2014 which they worked prior to their termination.

Justice of Appeal Copeland determined that the plaintiffs were not entitled to be paid performance fees by the defendant. The plaintiffs knew that they would be paid a share of the performance fees only through the investment professional, and possessing this knowledge, they signed employment agreements that did not provide for any performance fees to be paid by the defendant.

The plaintiffs had already been paid their share of the performance fees of the fund. The manner in which they were paid, however, was structured differently than for other portfolio managers because the fund that the plaintiffs managed had recently been acquired by the defendant.

Defendant did not exercise bonus discretion in a fair and reasonable manner

Justice of Appeal Copeland rejected the defendant’s argument that the discretionary nature of the bonus provision in the plaintiffs’ employment agreements meant that the employer was entirely unconstrained as to how that discretion was exercised. Her Honour explained that “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 only discretionary bonus that the plaintiffs received in 2014 was $577 each for the two-week notice period. Her Honour found that this was not a fair and reasonable exercise of the employer’s discretion in all of the circumstances.

Other employees received large discretionary bonuses

The plaintiffs argued that their discretionary bonus amount should be calculated in comparison with the amounts paid in 2014 to two similarly situated portfolio managers employed. The fund that these employees managed did not perform as well as the fund managed by the plaintiffs in 2014, yet these managers received approximately $200,000 in discretionary bonuses in 2014.

In December of each calendar year, the employer considered the allocation of discretionary bonuses from a pool of funds set aside for that purpose. A variety of factors were taken into account, including corporate performance, individual performance, attitude, teamwork, and each employee’s performance in their role.

Plaintiffs awarded bonuses of $115,000

In light of this, in addition to evidence that there was a significant bonus pool in 2014, and that the fund managed by the plaintiffs earned remarkable returns during the portion of 2014 prior to their terminations, Justice of Appeal Copeland held that a fair and reasonable exercise of the discretion under the employment agreement would be to award each plaintiff a discretionary bonus. The amount of the bonus was determined to be comparable to the similarly situated employees in 2014, pro-rated for the seven months that the plaintiffs worked in 2014, including the two-week notice period.

As a result, the Court of Appeal held that the plaintiffs were entitled to a discretionary bonus, and awarded damages of $115,000 to each plaintiff.

Contact the Employment Lawyers at Grosman Gale Fletcher Hopkins LLP for Guidance on Severance Packages

The employment law team at Grosman Gale Fletcher Hopkins LLP has been assisting workplace parties navigate their way through the termination process and severance matters for more than 30 years. If you are an employer or an employee going through the termination process, we can help. Our lawyers assist both employers who are seeking to terminate employees, and employees who have been terminated in ensuring that their rights and interests are protected. If you are seeking guidance related to a workplace or termination issue, contact us online or at 416.364.9599.