By Howard Levitt and Puneet Tiwari

The lesson for employers is to not rely on the word ‘discretion’

When we successfully argued the case of David Matthews against Ocean Nutrition Canada before the Supreme Court of Canada in June 2020, the country’s top court clarified some significant aspects of employees’ entitlements upon termination. Despite this decision, employers (or their counsel) continue to take legally untenable positions respecting departing employees.

Unless there is very explicit language stating otherwise, a bonus is payable during every departing employee’s notice (i.e.: severance period) even if that bonus is ostensibly, entirely “discretionary.”

This has become trite law. Departing senior executives whose remuneration is largely based on various types of bonuses are often faced with the argument that their bonus was discretionary and therefore none is owed. After all, the employer decided to dismiss the employee so why would they owe a discretionary bonus? That is often accompanied with the statement that the bonus is tied to performance and that the company’s performance had been poor.

The law is clear — discretion must be exercised reasonably and bonus history weighs significantly on an employee’s entitlement following dismissal.

A recent Ontario Court of Appeal decision clarified this issue for the uninitiated. Two hedge fund portfolio managers, James Bowen and Jonathan Wiesblatt, were terminated without cause from their positions with JC Clark. At the time of termination, they were each given two weeks’ notice and $577 in discretionary bonus, pro-rated for those two weeks. Nothing for their work in the months leading up to the dismissal. The trial judge dismissed their claim for the discretionary bonus.

They appealed the trial judge’s ruling. The employer maintained that the discretionary bonus provision in the employment agreement gave the employer unconstrained discretion.

The Court of Appeal rejected the argument that the employer’s discretion was entirely unconstrained. When 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. This has been the case for a number of years. A $577 bonus even for the two weeks and nothing for the preceding seven months was not fair and reasonable.

The court then turned to what bonus a fair and reasonable exercise of the discretion would result in for the seven months the appellants worked before dismissal and the two-week notice period (above and beyond the $577). (The provision of two-weeks’ notice was not challenged)

The employer provided evidence that the bonus was “purely subjective” and included factors such as length of service, company performance, attitude, teamwork and individual performance, among other things. The Court of Appeal ruled that this was inconsistent with the obligation to exercise discretion in a fair and reasonable manner. Two other employees not involved in the litigation were provided bonuses of $200,000 each for the full year in question. The court also reviewed evidence that showed the employer’s performance had been “jaw dropping” for that bonus year. It found that bonuses paid to other, similarly situate, employees is the best evidence of what bonus would have resulted from a fair and reasonable exercise of the discretion. As result, the appellants were awarded $115,000 in bonus each plus interest.

For employers, the lesson is to not rely on the word “discretion.” If you want to ensure you won’t have to pay out bonuses to long-departed employees, you must have language in place that is clear and unequivocal and disentitles the employee once they are terminated and through the notice period.

Employees should also take heed. If your employment contract is light on bonus descriptors and merely says “discretionary bonus,” you are likely owed it throughout your common law notice/severance period. If your colleagues at your former employer were paid bonuses, it is a clear signal that you should receive your fair and reasonable share. And if you do not, the court will ensure that you do.