When an employee’s employer is bought out by another company, the employee may either lose their job, or alternatively, arrangements may be made to retain the employee in an acquisition. When an employee is retained, it is crucial to ensure that the employee and the new employer are on the same page about the terms of the employment relationship. If a mutual understanding is not reached, it could lead to contract analysis by a court at a later date.
The appellants were employed at a hedge fund that was sold to the respondent
In Bowen v JC Clark Ltd, a recent case before the Ontario Court of Appeal, the appellants were portfolio managers of a hedge fund. The respondent acquired the hedge fund and the appellants were hired as part of that acquisition. The appellants worked for the respondent for one and a half years, from December 2012 until July 2014, when they were terminated without cause.
In lieu of notice, the appellants were given two weeks’ salary in addition to $577.00. The appellants started an action against the respondents seeking performance fees totalling more than $1.3 million, which they claimed was a term of their employment contract. The trial judge dismissed the action and the appellants appealed that decision to the Ontario Court of Appeal.
The appellants believed their new contract included performance fees earned in 2014
The hedge fund initially hired the appellants in 2003. Under the previous owner, Mr. Braun, the appellants grew from junior positions to managers of the fund by the spring of 2012. When Mr. Braun sold the company to the respondents, he negotiated a term that he would remain at the company to focus on investor-client relations. He also requested that the appellants be hired to manage the day-to-day activities of the fund. Mr. Braun and the appellants were supposed to be the three portfolio managers of the fund.
In finalizing these terms, Mr. Braun signed a “combination agreement”, which provided that Mr. Braun would receive a 40% share of the management fees and the same amount in performance fees earned by the fund for four years after the acquisition. This agreement also required the respondents to hire the appellants as per Mr. Braun’s request, and it allowed Mr. Braun to share these entitlement fees with the appellants.
Mr. Braun shared copies of this agreement with the appellants, but they did not have the final signed version. Before they signed their new offers of employment, Mr. Braun told the appellants that he planned to share his entitlement with them. Specifically, he committed to paying them 50% of the management fees and 100% of the performance fees allocated to him. A provision in the appellants’ employment contact also referenced their eligibility for a bonus based on performance and profitability of the hedge fund.
After being fired, the appellants wanted more money in performance fees
The fund did not earn any performance fees in 2012, therefore there were no fees to allocate in 2013. In December 2013, the respondent gave the appellants a discretionary bonus totalling $15,000. The performance fees earned in 2013 equated to over $121,000.00. In January 2014, Mr. Braun directed the respondent to share his 40% of that performance fee with the appellants. Each of the appellants was paid just over $24,000.00, in addition to the discretionary bonus. In July 2014, the respondents abruptly terminated the relationship with the appellants however Mr. Braun remained at the company. Heinsisted that the entire 40% of his performance fees for 2014 be paid out to each appellant (a total of $358,000.00 after tax). Unhappy with this amount provided by Mr. Braun, the appellants claimed the respondent owed them performance fees as well.
At the initial trial, the appellants were unsuccessful on the basis that Mr. Braun had paid them their performance fees for the portion of 2014 which they were employed with the fund. On appeal by the appellants, there were two main issues:
- The Court of Appeal considered the trial judge’s finding that “the appellants were not entitled to a percentage of the performance fees of the fund as an implied term of their employment agreements.”
- The court considered “the appellants’ claim that they were entitled to a discretionary bonus under paragraph 5 of their employment agreements.”
The appellants were not entitled to additional performance fee payout from the respondent employer
The Court of Appeal maintained the trial judge’s finding that the appellants were not entitled to a share of the fund’s performance fees as the appellants knew they would be paid performance fees through Mr. Braun, instead of directly from the respondents, when they signed their contract. The written terms of the agreement were clear on plain reading. The record at trial indicated that the appellants were not entirely satisfied with this arrangement and had unsuccessfully tried to renegotiate it numerous times. Ultimately, the appellants signed the employment contract under the understanding that the respondent was not responsible for providing them a share of the performance fees directly. The Court of Appeal found no error in the trial judge’s decision on this issue.
The payout of discretionary bonuses must be fair and reasonable
On the second issue, however, the trial judge did not allow the appellants to argue their case for entitlement to a discretionary bonus under paragraph 5 of the employment agreement they signed. The Court of Appeal found this to be an error. In considering the bonus provision set out in paragraph 5 of the employment agreement, the Court of Appeal found that although the bonus was discretionary, the respondent was not “entirely unconstrained as to how that discretion was exercised.” Implied in any discretionary bonus term is that discretion will be exercised both fairly and reasonably.
The Court of Appeal noted that the only discretionary bonus paid to the appellants in 2014 was the $577.00 which was termed a “2-week pro-rata bonus” for the two-week notice period from July 17 to July 31, 2014. There was no discretionary bonus for the period of January 1 to July 16, 2014. Consequently, the Court of Appeal found this not to be a fair and reasonable exercise of the respondent employer’s discretion. In referring to two employees similarly situated to the appellants, who were paid $200,000.00 as a discretionary bonus, the Court of Appeal held that the appellants should have been paid a discretionary bonus of their own in the same range. The appeal was therefore allowed in part. The Court of Appeal pro-rated the discretionary bonus owed to the appellants for the period of seven months of work, which was equivalent to $115,000, awarded to each appellant.
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