Discretionary Bonuses: How Much Maneuver Room do Employers Have?

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Many employers in Ontario provide discretionary bonuses to their employees. Discretionary bonuses are generally flexible and provide the employer with an opportunity to recognize exceptional performance without binding themselves to a specific or rigid bonus plan. However, while employers may have discretion over such bonuses, the discretion is not unfettered, and Ontario adjudicators have found that employers cannot just make “purely subjective” calls on awarding discretionary bonuses.

Recent Case Law

The Ontario Court of Appeal (“ONCA”) was recently asked to rule in an action featuring two terminated fund managers. Bowen v. JC Clark Ltd. 2022 ONCA 614 was an appeal that arose out of a trial decision in which, among other items, the trial judge refused to allow the terminated fund managers to argue that they were entitled to discretionary bonus under an earlier employment agreement.

The employees were terminated by the employer and were provided a payment of 2 weeks salary. In addition, they were provided with $577.00 each as a “2-week pro-rata bonus” for the two weeks notice period. Normally, they would be paid a bonus at the end of each year, however as they were terminated on July 16, 2014, their bonus only covered a 2-week notice period at the end of July 2014. They essentially did not receive any discretionary bonus for the period between January 1, 2014, and July 16, 2014.

In each employment agreement, the following clause appeared:

“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.”

The clear language in the provision was intended to provide a discretionary bonus to the employees at the “total discretion” of the Company. The employer’s position was that, given the clear language, the employer was completely unconstrained in how the discretion is exercised. In essence, the employer’s position was that the $577.00 provided is a valid exercise of the employer’s discretion with respect to bonus.

Court of Appeal Decision

The ONCA did not accept the employer’s argument. Instead, the Court noted that previous caselaw has stated that discretionary bonuses carry an implied term that discretion would be exercised in a fair and reasonable manner. The ONCA, instead, decided to look at the evidence and determine whether there was a reasonable way to calculate the proper amount of the bonus.

The evidence suggested that at the end of each year, two of the employer’s executives typically met to determine the amount of the bonus. During these meetings, a variety of factors was considered including corporate performance, individual performance, attitude, teamwork, length of service, seniority, and position within the company. The employer suggested that no calculations were involved, and allocation of the bonuses was “purely subjective”.

The employees argued that the court should consider other similarly situated employees of the company and use that information to determine the employees’ bonus entitlements. The court agreed and found that two employees of the employer were similarly situation and that each of them received around $200,000 from the bonus pool in respect of the entire 2014 calendar year.

The ONCA noted that there was objective evidence that the bonus pool was significant in 2014. This was based to a large extent on the “jaw dropping” performance of the company’s fund in 2014. As bonuses were awarded on the basis of individual and corporate performance and considering that the employees were involved in managing the fund for the first half of 2014 when such remarkable returns were realized, the ONCA found that a reasonable exercise of the employer’s discretion would be to award bonuses to the two terminated employees based on the same range as awarded to the two similarly situated employees.

Given that the two similarly situated employee were granted $200,000 that year, the ONCA found that each of the terminated employees was entitled to around $115,000 as a pro-rated bonus payment for the first half of 2014.

Takeaways

An “discretionary” bonus is not entirely without constraint. Employers who provide discretionary bonuses are required to exercise the discretion in a reasonable manner. Where the employer fails to do so, Ontario courts have indicated their willingness to step in and decide what a reasonable exercise of discretion will look like.

In particular, employers should carefully consider how they provide bonuses to employees who are similarly situated with respect to position in the company and contribution to corporate performance.

At Bridge Legal & HR Solutions, we provide expertise for employers of all sizes. Call us today at (647) 794-5442 for all your employment law and workplace investigation needs.

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