The Importance of Specific Terms in Employment Contracts

Written on behalf of Peter McSherry

For employees who rely on a bonus as a significant portion of their income, being terminated can create uncertainties regarding a fair severance package. Things can become even more complicated when a business is sold and it is unclear whether the sale will impact bonuses. 

A recent Ontario Court of Appeal decision highlighted these issues and provided guidance on how the courts address discretionary bonuses and agreements outside of the employment contract.

Hedge fund undergoes change in ownership

In the case of Bowen v. JC Clark Ltd., the appellant employees were employed as portfolio managers at a hedge fund which was acquired by the respondent employer in 2012. The employer hired the employees in their same role after the change in ownership from December 3, 2012 until July 16, 2014, at which time their employment was terminated without cause. The employees were each given two week’s salary plus a $577 payment in lieu of notice. The employees collectively sought over $1.3 million in performance fees they argued they were owed for the portion of their employment in 2014.

The trial judge found that the employee’s entitlement to a percentage of performance fees of the fund was only offered to them through the employer’s previous fund manager (“MB”) and this offering did not transfer when ownership changed hands. The trial judge also rejected the employees’ argument relating to entitlement of a discretionary bonus. 

The employees appealed both of these findings.  

New employment contracts 

The employees were hired by MB in 2012 and were responsible for managing the fund under MB’s supervision. When the fund was sold, MB stayed on with the fund to manage client relationships and he requested that the employees remain with the fund. The employer agreed and a new employment agreement was provided to the employees, stating the following:

“2.6(e)(ii) [the employer] offer employment … to each of [the employees] pursuant to an employment agreement … which … shall provide, among other things:

(i) for a base salary of $100,000 per annum;

(ii) for the potential (but not a guarantee) of [the employees] to be part of a discretionary bonus pool established by [the employer];

(iii) [RRSP contribution matching up to $5,000];

(iv) for [the employees] to receive such portions of the Allocated Trailer Amounts and Allocated Fee Amounts as may be determined by MB; and

(v) [a benefits package].”

MB’s own employment contract detailed that he would receive 40% of the fund’s performance fees. On the side, he indicated that he would share 50% of his management fees and 100% of the performance fees with the employees. 

Percentage payouts followed through on

At the end of 2013, MB followed through on his statement and provided a payout of $24,000 to each of the employees based on performance fees, along with an additional bonus of $15,000.  

While the employees were terminated in July 2014, MB remained employed with the employer. The employees were not employed at the end of 2014 which was when the performance fees and bonuses were issued. MB requested that his 40% share of the 2014 performance fees were still to be paid to the employees, which was equal to an after-tax payout of approximately $358,000 for each employee. 

The employees, however, believed that they were entitled to a larger performance fee payout.

Trial judge finds nothing more is owed to employees

The trial judge described the employee’s income as two portions, one portion was the salary, benefits and discretionary bonus, while the second portion was paid to them by MB which included a percentage payment of the fund’s performance fees. The employees’ contracts with the employer were silent about their subsequent agreements with MB. 

The trial judge dismissed the employee’s claim, finding that MB had actually paid the employees his share of the percentage fee and that the discretionary bonus claim was not sufficiently pleaded to be ruled on.

Court of Appeal upholds trial judge’s findings, allows discretionary bonus

The Court of Appeal first looked at whether the employees were entitled to a percentage of the performance fees as an implied term of their employment agreement and declined to interfere with the trial judge’s decision. Even if the employee’s thought their contract included a provision regarding performance fee payouts, it did not. In fact, the trial judge found that the evidence suggested that the employees knew that the performance fee payouts were not included in their contracts. 

The Court found that the amount of income that the employees earned was aligned with industry standards, and that the structure of their performance fee payout was not part of the typical payment structure.  

The Court did find that the trial judge erred in allowing the employees to argue their claim to the discretionary bonuses. Common law states that contracts should be exercised in a “fair and reasonable manner.” As the history of this bonus suggested that it was fair for the employees to expect it, the Court awarded a percentage of the bonus prorated for the amount of time they worked in 2014. 

Contact Peter A, McSherry in Guelph For Advice on Employment Contracts

At Peter A. McSherry Employment Lawyer, our team understands the unique nature of the issues that our clients face, which is why we provide our clients with a personalized assessment of their case. We represent employees in employment law matters including wrongful dismissal and provide advice on matters such as severance packages. We also assist employers in managing workplace matters by providing strategic advice on compliance with employment laws and risk management. Contact us by phone at 519-821-5465 or by online to schedule a consultation.