Discretionary Bonus, Part Two: "Sole Discretion" Is Not a License for Bad Faith
By Ethan A. Brecher, New York employment attorney, September 20, 2026
In this article:
The two words in every Wall Street bonus plan
What the Court of Appeals decided in 111 West 57th
The rule firms have relied on
What changes for discretionary bonus claims
What does not change
What a bad-faith bonus case looks like
What to do now
In Part One, I explained when a so-called "discretionary" Wall Street bonus is really an earned wage, and what happens when a firm terminates you just before payout. This post takes up the harder case: the bonus that genuinely is discretionary. The offer letter, the handbook, and the plan all say the firm decides whether to pay and how much, in its "sole" or "absolute" discretion.
For decades, firms have treated those words as the end of the conversation. On May 28, 2026, the New York Court of Appeals held that they are not.
The two words in every Wall Street bonus plan
Nearly every bank, fund, and broker-dealer reserves "sole discretion" over incentive compensation. The purpose is obvious. If the firm has no obligation to pay any particular amount, the employee has no contract claim when the number comes in at zero.
But New York law also implies in every contract a covenant of good faith and fair dealing: a promise that neither party will do anything to destroy the other's right to receive the fruits of the bargain. And where a contract gives one side discretion, the Court of Appeals held three decades ago in Dalton v. Educational Testing Service, 87 N.Y.2d 384, 389 (1995), that the covenant includes "a promise not to act arbitrarily or irrationally in exercising that discretion."
The open question was which principle wins when the contract says the discretion is "sole."
What the Court of Appeals decided in 111 West 57th
111 West 57th Investment LLC v. 111 W57 Mezz Investor LLC, 2026 N.Y. Slip Op. 03376 (N.Y. May 28, 2026), is not an employment case. It arose from the financing of the ultra-thin luxury tower at 111 West 57th Street in Manhattan. The plaintiff had invested $65 million in equity. The lender held a $25 million junior mezzanine loan and had a contractual right to assign it. The plaintiff alleged that the lender assigned the loan as part of a "backroom deal" with the assignee and the project's sponsor: the assignee would immediately declare a default, take the project's equity through a strict foreclosure, and wipe out the plaintiff, even though the lender's own financial models showed the equity was worth vastly more than the loan.
The First Department dismissed the implied covenant claim. Its reasoning will sound familiar to anyone who has litigated a bonus case: the lender had the absolute right to assign the loan in its sole discretion, and the covenant of good faith cannot override an express contractual right.
The Court of Appeals reversed, 4 to 3. Writing for the majority, Chief Judge Wilson adopted what he called the prevailing view among the Appellate Division departments: "a party's 'sole discretion' with respect to a right does not exculpate that party from complying with the implied covenant with respect to that right." The Court expressly identified the First Department's contrary statements, including that a defendant "cannot breach the covenant of good faith and fair dealing if the contract gives it sole and complete discretion," as in tension with the prevailing New York rule.
Two passages deserve attention. First, the Court reasoned that discretion makes the covenant more important, not less, because "more discretion affords a wider range of actions able to destroy the parties' bargain." Second, the Court drew a distinction that will be quoted for years: "a restriction on who is not a restriction on how." The lender's right to choose its assignee did not insulate it from liability for the manner and purpose of the assignment.
The Court also rejected the argument that sophisticated, well-represented parties should be left to the literal words of their contracts. The expectations of sophisticated parties, the majority wrote, are no less worth protecting.
The rule firms have relied on
Firms defending bonus claims rely on a familiar line of cases. In Namad v. Salomon Inc., 74 N.Y.2d 751 (1989), the Court of Appeals held that a clause placing bonuses "at the discretion of the management" unambiguously vested the firm with discretion over the amount. In Hall v. United Parcel Service of America, 76 N.Y.2d 27 (1990), the Court held that "an employee's entitlement to a bonus is governed by the terms of the employer's bonus plan." In Kaplan v. Capital Co. of America LLC, 298 A.D.2d 110 (1st Dep't 2002), a case against a Nomura affiliate, the First Department held that an employee had no contractual right to a bonus the handbook described as purely discretionary, and that oral promises from officers could not change that.
The First Department went further in Hunter v. Deutsche Bank AG, 56 A.D.3d 274 (1st Dep't 2008). After rejecting the contract claims because the documents made bonuses "solely and completely" a matter of the bank's discretion, the court dismissed the implied covenant claim for lack of evidence of bad faith, and questioned whether such a claim could even coexist with a right of "unfettered discretion." Federal courts followed. In O'Grady v. BlueCrest Capital Management LLP, 111 F. Supp. 3d 494 (S.D.N.Y. 2015), the court called it "well established" that an employee cannot recover under a plan that gives the employer absolute discretion over whether to pay.
111 West 57th answers the doubt expressed in Hunter. As a general rule of New York law, sole discretion and the implied covenant coexist.
What changes for discretionary bonus claims
No court has yet applied 111 West 57th to a bonus dispute. As of this writing, the handful of decisions citing it are commercial contract cases in the Southern District of New York. What follows is my assessment of where the argument goes.
The question shifts from whether to how. Namad, Hall, and Kaplan are contract interpretation cases. They establish that the employee has no right to a particular bonus. They do not address whether the firm may exercise its discretion for an improper purpose. After 111 West 57th, a firm's discretion over whether to pay and how much does not automatically shield why it made the decision.
"Sole discretion" is a weaker basis for a motion to dismiss. The Court of Appeals reinstated the claim at the pleading stage, accepting the allegations of a bad-faith scheme as true. A well-pleaded complaint, or a FINRA statement of claim, alleging specific facts showing that a bonus was zeroed out arbitrarily or in bad faith now has the state's highest court behind it.
The bargain matters. The covenant protects what a reasonable person in the employee's position would have understood the deal to include. On Wall Street, where the bonus is the bulk of compensation and the reason the employee took the job, a reasonable professional understands that the firm will decide the number honestly, based on performance, the business, and the market, and not as a weapon.
What does not change
Employees and their lawyers should be realistic about the limits.
Hall, Namad, and Kaplan remain good law. Plan terms still govern. Vesting conditions and payment-date requirements are still enforceable, subject to the good-faith limits discussed in Part One.
The covenant cannot contradict the contract. Under Murphy v. American Home Products Corp., 58 N.Y.2d 293 (1983), no obligation will be implied that is inconsistent with the agreement's express terms. The Court of Appeals repeated that the burden on the plaintiff is a heavy one, and that the specific wording of the grant of discretion will shape the scope of any implied duty.
Termination is carved out. The Court expressly preserved the rule treating sole discretion to terminate a contract as immune from the implied covenant. One federal court has already applied that carve-out. An at-will firing, by itself, is still not a good-faith claim.
The bar is bad faith, not disappointment. The standard is arbitrary, irrational, or bad-faith conduct that destroys the benefit of the bargain, not poor judgment or a tough year. A number lower than you expected is not a claim.
Duplicative claims are dismissed. An implied covenant claim based on the same facts as a breach of contract claim will not survive. It has to be pleaded as its own theory.
The Labor Law remedies do not follow. Under Truelove v. Northeast Capital & Advisory, 95 N.Y.2d 220 (2000), a truly discretionary bonus is not a "wage." The doubled damages and attorney's fees discussed in Part One are not available on a pure good-faith theory.
The decision was 4 to 3. Judge Garcia's dissent warns that the ruling will unsettle commercial expectations. Defense counsel will quote it, and will argue the case should be confined to its facts.
What a bad-faith bonus case looks like
The cases worth bringing are the ones where the firm's stated discretion is cover for something else:
Your number was set and communicated, then withdrawn after you gave notice, declined to sign a new restrictive covenant, or raised a concern.
Your bonus was cut to zero shortly after you complained about compensation, compliance, or treatment, while your production was unchanged.
Everyone on the desk was paid on the same metrics except you, and no one will explain why.
Your share of the pool was redirected for reasons that have nothing to do with performance, the business, or the market.
A firm that had a bad year, or documented real performance problems before bonus season, is exercising discretion. A firm that used the bonus to punish, to gain leverage, or to take the value of a year's work for itself is doing something the Court of Appeals has now said "sole discretion" does not protect.
What to do now
Do not sign a separation agreement or release before having it reviewed by counsel. Preserve your bonus history, accrual or compensation statements, performance reviews, and every communication about your number, including texts. Note the timing: when the compensation decisions were made, when you were told, and what happened in between. Good-faith cases are built on the gap between what the firm said it was doing and what the record shows it did.
I represent traders, bankers, portfolio managers, brokers, and other financial professionals in bonus, commission, deferred compensation, and wrongful termination disputes against Wall Street firms. Call 860-590-0138 or email ethan@ethanbrecherlaw.com for a confidential consultation.
Ethan A. Brecher, Esq. is the principal of the Law Office of Ethan A. Brecher, LLC, 244 Fifth Avenue, Suite B241, New York, NY 10001. This article is for general information and is not legal advice. Attorney advertising. Prior results do not guarantee a similar outcome.
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