Employers Must Be Reasonable and Fair With Discretionary Bonuses

Employers sometimes qualify bonuses as “discretionary” to give themselves the flexibility to decide whether to pay them and how much to pay. Employers also consciously or unconsciously count on bonuses to serve as a retention tool.  They tend to assume the employee has to be employed the entire year to even be eligible. Delayed payment of such bonuses, often 3 to 6 months after the year has ended, is intended to incentivize employees to stay employed until they are paid out. Many also assume that once an employee gives or receives notice of termination, they can no longer be required to pay such discretionary bonuses. Certainly, after a termination, employees no longer have an interest in rewarding or retaining the bonus eligible employee. But these employer assumptions are not necessarily ones the courts will uphold as a recent Ontario Court of Appeal decision confirms.

In Bowen v. JC Clark Ltd., 2022 ONCA 614, the plaintiffs, both portfolio managers of a hedge fund, were entitled to an annual bonus that was payable “at the total discretion of the Company… at the end of each fiscal year depending on factors that include [their] personal performance and the profitability of the Company”. In 2013, the employees had each been paid $15,000 for their discretionary bonus, but were only paid $577 each for their 2014 bonus when they were terminated in July of 2014. The employer argued that it had entirely unconstrained discretion in determining whether any bonus would be paid. The court disagreed.

Where an employment agreement provides for a discretionary bonus, the court held it is an implied term that the discretion will be exercised in a fair and reasonable manner. This is consistent with the broader duty of good faith both parties owe the other in the employment relationship, according to the Supreme Court of Canada. The court found that it was unreasonable to deny the employees a larger bonus for the following reasons:

• The discretionary bonuses came from a pool of funds that were set aside for that purpose;
• The employer considered a variety of factors, including:
  • corporate performance,
  • individual performance,
  • attitude,
  • teamwork,
  • tenure,
  • seniority,
  • position, and
  • fund performance;
• Two similarly situated employees had been awarded nearly $200,000 each in discretionary bonuses; and
• The employees’ funds had “jaw dropping” returns in 2014.

The court awarded each employee $115,000 for the discretionary bonuses that each would be entitled to for the 7 months they were employed in 2014. Interestingly, the employees founded their claim to bonus solely on their work and contribution to the date of termination, not over any severance period.

What is remarkable about this decision is not only that the court substituted its judgment for the clear broad employer discretion but also that it awarded bonuses to employees who were terminated well before completing the year on which bonus was potentially earned. The latter point is particularly troubling given the widely held assumption (and common practise) that to receive annual bonuses, employees must be employed (or entitled to termination notice or severance) through to the end of the year. The case would support a claim for the bonus even if the employees had voluntarily resigned—a result that most employers would reject.

Takeaways

As illustrated in the case above, even strong language granting the employer ‘absolute discretion’ does not confer an unconstrained discretion in awarding or denying bonuses – the employer is still expected to exercise good faith and be fair and reasonable in their exercise of discretion.

Although it may not have helped in the above case, where the bonus was closely tied to performance, employers can take some steps to give themselves potentially more control over the payment of a discretionary bonus:

• If the intention is for the bonus to be truly subjective or discretionary, do not use (or at least publish) objective metrics such as individual or company performance in determining bonus should be awards;
• Including language that expressly states the bonus is designed in part to encourage employee retention and reward employees who remain employed only. This means a court will have to consider this motivation in deciding if the discretion must include an award of benefits;
• Expressly stating that the bonus is only payable if the employee is actively employed either throughout the year through to the end of the year or even to the date of payment. A clause denying pro-rated bonuses for part years, other than due to a disability leave can also be added;
• Clearly and unambiguously removing the employee’s right to receive the bonus over any notice period or pay in lieu of that period that may apply if the employee is terminated without cause or even gives advance notice of resignation. Other cases say such language has to be very clear and, in some provinces, needs to make an exception for any payment required by Employment Standards legislation, particularly the Ontario Employment Standards Act, 2000.

If you want more information on this topic, you can contact us at:

Geoffrey Howard:       ghoward@howardlaw.ca

604 424-9686

Sebastian Chern:         schern@howardlaw.ca

604 424-9688