Discretionary bonuses may sound like they give an employer a relatively free hand when it comes to deciding how much to award or even whether to make an award at all, but the reality is not quite so straightforward. Courts will consider the way in which discretion is exercised, not simply whether it exists, as has been shown in the recent case of Gagliardi v Evolution Capital Management LLC.
Background
The claimant was a London based portfolio manager specialising in block trading, employed by Evolution Capital Management ("ECM") to launch and develop its block trading fund. Although his contract was governed by Delaware law, it also still included the implied term of mutual trust and confidence as a matter of English law.
The claimant's contract terms included a discretionary bonus. The contract provided that "you may receive a discretionary bonus based on your individual performance and [ECM]'s overall performance". In the event of termination of employment, any bonus was required to be paid within a month. Trading developed very quickly and arguments arose around trade strategy and risk management. At the end of 2021, the claimant was served with a subpoena by the US Department of Justice ("DoJ") relating to block trading malpractices. In January, ECM was also served with a subpoena. In February 2022, the claimant was dismissed "without cause". Bonus payday was in March 2022. ECM decided to pay a zero bonus despite the claimant having generated 97% of the fund's profit. The claimant issued proceedings in the High Court claiming entitlement to a discretionary bonus.
The High Court found that ECM's reason for not paying a bonus was because it wanted to "wait and see" what the outcome of the DoJ investigations were. That, according to the High Court, was not an option that was open to them. The High Court considered that the contract was unambiguous in terms of how the discretionary bonus should be calculated. If profit is generated (which it had been) a bonus is payable based on performance. The bonus was discretionary to the extent of ECM's assessment of the claimant's revenue contribution to business profits. That discretion must be exercised in good faith and not irrationally, arbitrarily, or capriciously. The wording of the contract did not allow ECM to exercise its discretion in relation to other matters such as disagreements that had taken place or any concerns regarding reputational damage arising from the DoJ investigation. By taking matters other than performance into account and awarding a zero bonus, ECM had also breached the implied term of trust and confidence. The High Court awarded the claimant over $5 million (USD) in damages.
Commentary
This case highlights that the starting point, when considering the level of a discretionary bonus to be paid, is the contractual clause itself, including what is stated as the purpose of the bonus and whether there is any prescribed criteria setting out how it is calculated. Decisions in relation to discretionary bonuses can be challenged as irrational if relevant factors are ignored or irrelevant matters considered.
When a contract expressly links bonus to performance, employers must genuinely assess performance and exercise discretion rationally and in good faith. Payments cannot be withheld in respect of an ongoing investigation where an outcome is not known at that stage.
For employers, this case highlights the importance of a well drafted bonus clause and of keeping records of how and why discretion in respect of bonus was exercised. For employees, it underlines that a nil (or other level of) bonus can be challenged irrespective of it being discretionary.
Although this case deals with English contract law on this point, the same principles apply under Scots law. Employers may exercise discretion if the decision is within the contract, rational and reasonable, made in good faith and consistent with trust and confidence. Although not an issue in this case, decisions must also be made in a non-discriminatory way.
