Withholding a $300,000 Bonus not a Constructive Dismissal

By Colin Edstrom
Categories: Blog

A recent case out of Ontario illustrates that not all refusals to pay an employee’s compensation amount to a constructive dismissal, even if the amount owing is over $300,000. As previously discussed here, unilaterally altering fundamental terms of an employment contract may constitute a constructive dismissal. In these situations, the employee, upon resignation, is entitled to treat the employer’s action as a repudiation of the employment contract and sue for damages in lieu of reasonable notice.

When does a Constructive Dismissal Arise?

The Supreme Court of Canada in Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10, recently stated that a constructive dismissal can arise in two ways:

  • by a single unilateral act that breaches an essential term of the contract of employment (such as a reduction in wages or benefits, demotion or change in work location); or
  • by a series of acts by the employer that, taken together, show the employer no longer intends to be bound by the employment contract (such as where an employer condones an intolerable working environment or engages in a pattern of bullying and harassment).

In order for a single unilateral act to amount to a constructive dismissal, the employer’s conduct must be found to constitute a breach of the employment contract and substantially alter an essential term of the contract. While minor alterations may give rise to damages, the changes must be fundamental in order for the employee to legitimately treat the contract as at an end. The question is whether, given the totality of the circumstances, a reasonable person in the employee’s situation would have concluded that the employer’s conduct evinced an intention to no longer be bound by the employment contract.

Why did a $330k breach of contract not amount to a constructive dismissal?

In Chapman v. GPM Investment Management, 2017 ONCA 227, the employee was entitled to a bonus payment of 10% of the employer’s pre-tax profit. After a few years of employment, the employer advised the employee that it was excluding profits arising from a particular transaction from his bonus payment calculation. The employer believed it had the right to exclude the profits from the bonus calculation pursuant to wording of the bonus clause in the employment contract. The exclusion of profits reduced the employee’s bonus entitlement by $329,687. The employee resigned and sued his employer, taking the position that the reduction in his bonus calculation constituted a constructive dismissal.

The Ontario Superior Court of Justice and Court of Appeal disagreed with the employee. Although the denial of bonus payments constituted a breach of contract, it was not a substantial breach that altered an essential term of the contract. The dispute involved a disagreement about the interpretation of the bonus scheme. Employers and employees are permitted to disagree about the terms of an employment agreement. Just because the employer’s interpretation was incorrect did not mean that the employer evinced an intention not to be bound by the employment contract. In reaching this conclusion, the courts relied heavily on the fact that the case did not involve a permanent alteration to the bonus scheme. The employee also gave evidence that, despite the non-payment, the terms of his employment had not and would not change. As such, the employee was entitled to damages for failure to pay his bonus but not damages for constructive dismissal.

This case is an interesting one as it challenges the widely held notion that a proportionately large decrease in compensation constitutes a constructive dismissal. Reducing the employee’s bonus by $329,687 amounted to a unilateral reduction of 28% of the employee’s expected compensation – an amount beyond the threshold that many would consider amounting to constructive dismissal. What Chapman illustrates is that a breach of contract is not enough to establish repudiation. Constructive dismissal requires both a breach of contract and an assessment of whether a reasonable person would consider himself or herself to be constructively dismissed. Sometimes a breach of contract is simply a breach of contract.