Take care when labelling a bonus as discretionary in a contract

The High Court recently issued a ruling regarding the enforceability and interpretation of "discretionary" bonus provisions in employment contracts. Mr. Gagliardi filed a claim for breach of employment contract against a former hedge fund that engaged him as a senior portfolio manager. The contract in question comprised a salary, a sign-on payment, a new-issue bonus, and a discretionary bonus that was contingent upon profitable revenues. Due to his proficiency in block trading and his valuable relationships with major US banks, the CEO specifically recruited Mr. Gagliardi to expand into the US market. The hedge fund's primary objective was to utilise these relationships to expand its business rapidly, with the CEO implicitly acknowledging that they were essentially "buying his relationships" by hiring Mr Gagliardi on a "trade and get paid" basis.

Mr. Gagliardi initiated trading in the A1 share class immediately upon his arrival, without completing his onboarding process or receiving formal risk limits. This action resulted in a dispute with the risk manager and CIO. Nevertheless, the CEO consistently prioritised Mr. Gagliardi's trading activity over internal procedures, despite the fact that he frequently exceeded specified trading limits and frequently granted retrospective approval. Mr. Gagliardi's disregard for compliance was also disregarded, as the CEO continued to prioritise profitability. Subpoenas were issued to the claimant and the hedge fund in early 2022 as a result of a market-wide regulatory inquiry into block trading. Consequently, the fund withheld payment of the claimant's discretionary bonus. This prompted the claimant to file a lawsuit against the hedge fund for breach of contract.

Mr. Gagliardi was awarded $5.385m in damages (plus interest) by the High Court, which determined that his former hedge fund had indeed violated its contractual obligations by failing to provide him with any discretionary bonus for his trading activities in 2021. The Judge determined that the hedge fund's contractual discretion, which was regulated by Delaware law, was neither broad nor unrestricted, and, as a result, was subject to predetermined contractual criteria.

The High Court has upheld the principle that an employer's discretion is not absolute in cases where a bonus is linked to measurable performance criteria, such as revenue contributions and profits, despite the use of the term "discretionary." This ruling underscores the fact that an employer is prohibited from arbitrarily or irrationally declining to provide a bonus to an employee who has demonstrated exceptional financial performance. This would be a breach of contract, regardless of any allegations of minor breaches, misconduct, or a poor attitude that did not exceed the threshold for disciplinary action or termination during the relevant period. Consequently, employers should exercise caution when incorporating discretionary bonuses into contracts, particularly in terms of phraseology.