Case of the Month: Not Paying Required Bonus Is NOT Constructive Dismissal, Says Ontario Court

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Is an employer’s failure to honour a contractual obligation to pay a 6-figure bonus grounds for constructive dismissal? If you polled lawyers, most would probably say YES. And based on previous cases, that would be a pretty good guess.  But a recent case from Ontario confirms what those lawyers would also be the first to tell you: You just can’t predict how a court will rule in any particular constructive dismissal case.

THE CASE

What Happened: A real estate management firm paid its CEO 10% of net profits in annual bonuses. For 8 years, all was well. But in year 9, the bonus formula came into question when the firm excluded the proceeds of a lucrative land sale from the CEO’s 2011 bonus, costing him $329,687.  The CEO sued claiming breach of contract and constructive dismissal. The court ruled that shortchanging him on the bonus was a contract violation but not grounds for constructive dismissal. The CEO appealed.

What the Court Decided: The Ontario Court of Appeal upheld the ruling and ordered the CEO to pay the firm $17,000 in legal costs.

How the Court Justified Its Decision:  The bonus dispute was apparently the only problem in an otherwise positive relationship. But even a single act by an employer can amount to constructive dismissal if:

  • It breaches the employment contract; and
  • It substantially alters an essential contract term.

As even the firm was willing to acknowledge at this point, not paying $329K+ in bonuses violate d the CEO’s contract. But did it substantially change the essential terms of the CEO’s employment as required by prong 2?

The Court said no.

Making a non-discretionary bonus a discretionary bonus is the kind of substantial alteration that triggers constructive dismissal. But that’s not what happened in this case.  The firm’s failure to pay the bonus was a one-time situation that didn’t change the bonus formula or the CEO’s basic compensation and duties. The Court noted that during his cross-examination, the CEO admitted that he expected to continue being paid bonuses as he had before. Rather than a fundamental alteration of the CEO’s employment, the bonus dispute was a squabble over contract interpretation and how the bonus formula applied to a single transaction, the Court concluded.

Chapman v. GPM Investment Management, 2017 ONCA 227, March 21, 2017.

WHAT IT MEANS

An employer’s failure to pay a contractual bonus may or may not be grounds for constructive dismissal. In Chapman, it wasn’t; in other cases, it was.  The moral of Chapman is that each case is different and that situations with seemingly identical facts can have precisely opposite outcomes.

Sometimes, especially in close cases, the ruling is based not just on the unique facts but subtle and subjective dynamics that the court doesn’t acknowledge or even recognize. That might have been why the CEO in Chapman failed where others in similar situations have succeeded. Simply stated, it appears that the CEO rubbed the courts the wrong way. Exhibit A is that he didn’t just lose the case, he also had to pay the firm’s legal costs.

One possible explanation is that the CEO was the aggressor in both the original case and the appeal. As both courts noted, suing wasn’t his only option. From the outset, the firm let the CEO know of its willingness to consider dispute resolution alternatives. It was an offer that “a commercially sophisticated party [like the CEO] could have been expected to explore,” according to the Court. Spurning the offer in favour of litigation ended up hurting not just the credibility of the CEO’s constructive dismissal argument but apparently his likeability in the eyes of the judges.