Company’s Failure to Pay $300,000 Bonus Not a Constructive Dismissal Says Court of Appeal

The Ontario Court of Appeal recently upheld a decision of a lower court which found that the failure of a company to pay an employee a $300,000 bonus was not a constructive dismissal, but rather, a “disagreement over the interpretation of [the employee’s] bonus scheme”.

What Happened?

The company in question provides real estate management services. The employee had worked there for nine years as CEO and President, as well as Director of a related entity that held ownership interest over the company.

Over the course of his nine-year tenure with the company, the employee entered into three separate “memorandums of understanding” (essentially contracts setting out the terms of his employment). The contract that was in force at the time the employee departed the company stated that he was entitled to an annual bonus in addition to his base salary, stock options, and various other benefits.

The employee met with the company’s Chief Financial Officer in October 2011 to discuss his bonus. He was surprised to learn that the company was planning to exclude profit earned from the sale of certain lands (the “Ellersie lands”) from the calculation of his bonus. This reduced his bonus by almost $330,000.

The employee believed that this constituted constructive dismissal and left his job. He sued for breach of the employment contract and constructive dismissal.

The company believed that the employee had voluntarily resigned rather than being constructively dismissed, and asserted that no bonus was payable on the profits from the sale of the Ellersie lands.

The Original Trial Judge

The original trial judge found that the company had breached the employee’s contract by not including the profit from the Ellersie lands transaction in calculating the bonus; however, he did not find that the employee had been constructively dismissed.

The breach of contract did not alter a fundamental term of the employee’s contract, rather, it was a “disagreement over the interpretation of the application of [his] contract”. The original trial judge ultimately concluded that:

a disagreement regarding the calculation of a bonus is not necessarily constructive dismissal.

The employee appealed, and the Court of Appeal considered whether the trial judge had misapplied the test for constructive dismissal.

The Test to Establish Constructive Dismissal

There are two ways in which to establish constructive dismissal. The first is to show that the employer has breached an essential term of an employment contract through a unilateral action. The second is to establish that, through a series of actions, the employer has shown that it no longer intends to be bound by the employment contract.

In both cases, the employer’s perceived intention to longer be bound by the contract is what gives rise to the constructive dismissal. An employee is not required to show that the employer actually intended to no longer be bound by the contract, but that a reasonable person in the employee’s situation would have concluded that this was the employer’s intention.

The Court of Appeal

On appeal, the employee argued that the trial judge incorrectly applied the “reasonable person” standard, and conflated the two branches of the test for constructive dismissal.

The Court of Appeal found that the original trial judge did not make an error in applying the test, or in concluding that the breach of contract by the employer did not constitute a “substantial alteration to an essential term of the contract” or “an intention not to be bound by the contract”.

Yes, the employee’s contract with the company required that he be paid a bonus based on all of the company’s income, including any capital gains made on sales such as the sale of the Ellersie lands. Therefore, by not including the sale of those lands in calculating the employee’s bonus, the company had breached its contract.

However, the original trial judge found that there had been no alteration to any term in the employment contract- for instance, the employee’s duties remained the same, and the base compensation remained unchanged.  Further, the company had stated that it intended to continue to be bound by the contract, and the employee himself had admitted, in cross examination, that he believed that none of the terms of his employment had changed.

In addition to correctly considering the above, the original trial judge had also considered all other relevant circumstances in concluding that there was nothing that could lead a reasonable person in the employee’s position to conclude that the company’s breach of contract indicated its intention not to be bound by the contract.

While the employee had argued that he had been placed in the “untenable position” of either having to forego his bonus of almost $330,000 and keep his job, or sue to recover the bonus amount and lose his job, the trial judge pointed out that the employee had other options outside of these two avenues, including going to arbitration, or following up on the CFO’s suggestion that the company might be able to pay a bonus if the other investors in the Ellersie lands agreed.

The Court of Appeal found that it had been open to the original trial judge to conclude that there were other dispute resolution alternatives available to the employee, and that:

….a reasonable person in the [employee’s] position would not have considered himself to have been constructively dismissed when the bonus on the sale of the Ellersie lands was refused.

The Court of Appeal concluded that the original trial judge had not made an error in characterizing the dispute:

In summary, the trial judge made no error in characterizing the dispute as solely about whether a particular transaction – one that he accepted could not be repeated during the remainder of the contractual term – fit within the unaltered bonus structure. The trial judge’s rejection of the [employee’s] argument that the [company] had converted [his] bonus structure from non-discretionary to discretionary, and [the trial judge’s] finding that the disagreement over what constituted income for the calculation of the [employee’s] bonus was not an alteration to the contract, let alone a substantial alteration, were supported by the evidence.  Finally, the conclusion that the failure to pay the bonus in question did not constitute constructive dismissal, notwithstanding that non-payment was in breach of the [employee’s] employment contract, was reasonably open to the trial judge after a proper analysis and application of the first branch of the [constructive dismissal] test.

The appeal was dismissed, and the company was awarded $17,000 in costs.

If you are an employee and believe you have been constructively dismissed, contact Guelph constructive dismissal lawyer Peter McSherry by phone at 519-821-5465 or by e-mail to schedule a consultation. I can ensure that your case is handled properly and efficiently and that you receive a fair settlement.