Employee loses fight over withheld bonus

Court deals a tough lesson to worker who quit, then sued his employer

Employee loses fight over withheld bonus
by Shreya Patel

A recent decision of the Ontario Court of Appeal stands as a reminder to employees that not all breaches of contract by the employer are sufficient to establish constructive dismissal (i.e., that the employer no longer intends to be bound by the employment contract).
In Chapman v. GPM Investment Management, the appeal court agreed with the trial judge that the employer’s (“GPM”) refusal to pay the employee (“Chapman”) a portion of his bonus did not alter an essential term of the employment contract between GPM and Chapman. It determined that the employer never acted in a manner that suggested that it no longer intended to be bound by the employment contract.
Chapman’s employment contract entitled him to an annual bonus calculated based on 10 percent of GPM’s pre-tax profits. GPM excluded the profit earned from one particular transaction from the calculation of Chapman’s bonus. The bonus from that transaction would have amounted to $329,687. Upon being denied this bonus, Chapman was reasonably upset. What was left to be determined was whether it was reasonable for Chapman to quit and sue his former employer for constructive dismissal.
The trial judge ruled that the employer had breached Chapman’s employment contract by not paying the bonus, since the contract clearly entitled him to profits deriving from the disposition of property. The Court of Appeal agreed with that finding, and further found that on the issue of breach of contract, Chapman was entitled to damages in the amount of the unpaid bonus.
However, Chapman was not entitled to wrongful dismissal damages arising from constructive dismissal – which would have amounted to 18 months’ pay in lieu of notice.
The Court of Appeal, reaffirmed the test for constructive dismissal established by the Supreme Court of Canada, that constructive dismissal can be established in two ways:
  1. The employer’s conduct must be found to constitute a breach of employment contract and that conduct must substantially alter an essential term of the contract; and,
  2. Under the second branch, the cumulative effect of an employer’s past acts should establish that the employer no longer intends to be bound by the contract.
Under either branch, the ultimate inquiry is whether the employer by its conduct evidenced an intention not to be bound by the contract.
The court ruled that GPM’s failure to calculate the bonus properly did not amount to a unilateral change in the bonus structure. It was merely a disagreement over the interpretation of the contract and a reasonable person would conclude that the essential terms of the contract remained intact.
Based on the evidence presented at trial, the court concluded that there had been no alteration to any term of Chapman’s contract, his duties and compensation remained the same (including his entitlement to bonuses), and in fact he acknowledged in cross-examination that he expected his bonuses would be calculated and paid as they had been in the past.
Since Chapman was not constructively dismissed, his claim for damages based on the employer’s failure to provide him with reasonable notice of termination was denied.
While the outcome in this case is reassuring for employers, it serves as a good reminder to be cautious of possible constructive dismissal claims arising from breach of contract. The lawyers at CCPartners are familiar with all aspects of constructive dismissal litigation, including ensuring properly drafted employment contracts to reduce employer’s liability. Click here for members of our team who can assist you with all issues relating to constructive dismissal.

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