Tuesday, 21 March 2017

Failure to Pay $300,000 Bonus a Breach of Contract Only and Not a Constructive Dismissal: ONCA

(c) istock/Jummie

Can an employer breach a rather fundamental element of an employee’s employment contract (to the tune of over $300,000) without triggering a constructive dismissal?

In a decision released March 21, 2017, Chapman v. GPM Investment Management, 2017 ONCA 227, the Court of Appeal for Ontario said “yes.”

Facts

The case concerned an appeal of the decision of Mr. Justice Drew S. Gunsolus of the Superior Court of Justice, dated November 27, 2015, with reasons reported at 2015 ONSC 6591.

As framed by Justice Bradley Miller, the sole issue on the appeal was whether an employer’s refusal to pay a bonus merely breached the employee’s employment contract, or whether it also constituted constructive dismissal. Justice Miller (with whom Justices van Rensburg, Hourigan concurred) found that it did not constitute a constructive dismissal.

The issue surrounded the quantum of the employee/appellant’s 2011 bonus. On October 19, 2011, the appellant met with Steven Johnson, the Chief Financial Officer of the respondent IAM, to discuss the quantum of his 2011 bonus. The appellant was surprised to learn that GPM planned to exclude from the calculation of its pretax income (which was used to calculate the appellant’s bonus) profit from the sale of lands that it had purchased several years earlier as an investment (the “Ellerslie lands”). The exclusion of profits from the sale of the Ellerslie lands reduced the appellant’s bonus by $329,687.

Johnson and the appellant met again on October 24, 2011, and Johnson confirmed this decision. He left open the possibility, however, that GPM might reconsider if the other investors in the Ellerslie lands would be willing to contribute. The appellant did not follow up on this suggestion, on the basis that the other investors had no legal obligation to contribute to his bonus.

On October 26, 2011, the appellant left his employment, after taking the position that GPM’s refusal to include the profit from the sale of the Ellerslie lands in the calculation of his bonus constituted constructive dismissal. GPM took the position that he had voluntarily resigned.

Mr. Chapman sued for damages for breach of his employment contract and for constructive dismissal. The respondents defended the action, asserting that no bonus was payable on the Ellerslie lands and that the appellant had not been constructively dismissed.

Although Justice Gunsolus found that GPM had breached the appellant’s contract by not including the profit from the Ellerslie lands transaction in the calculation of the appellant’s bonus, he did not find that the appellant had been constructively dismissed. The trial judge found that the breach did not alter an essential term of the appellant’s contract. He characterized the dispute between the parties as more a matter of “disagreement over the interpretation of the application of Mr. Chapman’s bonus scheme”. This was not, therefore, a unilateral change in the bonus structure by the employer, but a disagreement over the interpretation of the contract, and a “disagreement regarding the calculation of a bonus is not necessarily constructive dismissal”.

Justice Gunsolus concluded that “(a)ny reasonable person would conclude that the essential terms of the employment contract had not been changed, but in fact remained intact.”

Decision

In dismissing the appeal with costs, Justice Miller reasoned as follows:

[13] As the trial judge noted, there are two routes that a plaintiff can follow to establish constructive dismissal, as set out in Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10, [2015] 1 S.C.R. 500. [For my summary of such decision see my post Supreme Court of Canada Confirms that There are Two Paths to Constructive Dismissal.]

[14] The first branch is apt where an employer has, by a single unilateral act, breached an essential term of the contract of employment. The second branch allows for constructive dismissal to be made out where there has been “a series of acts that, taken together, show that the employer no longer intended to be bound by the contract”. On both branches, it is “the employer’s perceived intention no longer to be bound by the contract” that gives rise to the constructive dismissal: Potter, at para. 43.

[15] The first branch – for a single unilateral act – has two steps: (1) the employer’s conduct must be found to constitute a breach of the employment contract, and (2) the conduct “must be found to substantially alter an essential term of the contract”: Potter, at para. 34.

[16] In contrast, the focus of enquiry on the second branch is not on a single act of the employer, but on the “cumulative effect of past acts by the employer” that establish that the employer no longer intends to be bound by the contract: Potter, at para. 33.

[17] The perspective shifts during the analysis. In ascertaining whether an employer’s conduct has amounted to a breach of contract (the first step of the first branch), the test is objective: Potter, at para. 62. Thereafter, on both the second step of the first branch and on the second branch, the perspective shifts to “that of a reasonable person in the same circumstances as the employee …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 contract]” (emphasis in original): Potter, at para. 63. In these parts of the analysis, the trial judge must conduct the enquiry from the perspective of the reasonable employee. This perspective excludes, for example, reliance on information that “the employee did not know about or could not be expected to have foreseen.” Potter, at paras. 62 and 66. Furthermore, the employee is not required to establish that the employer actually intended to no longer be bound by the contract, but only that a reasonable person in the employee’s situation would have concluded that this was the employer’s intention: Potter, at para. 63.

[24] Of critical importance to this appeal is the trial judge’s analysis of the breach of contract, and whether that breach constituted a substantial alteration to the contract.

[25] GPM is in the business of providing real estate management services. As noted by the trial judge, its income, for the most part, is generated through operating fees. As part of his remuneration, the appellant was entitled to a bonus calculated on GPM’s profits. There were two exceptional asset sales, outside of GPM’s ordinary operations, that generated substantial capital gains for GPM. One of these was the disposition of a property management company, Darton Property Advisors & Managers Inc. Income generated by Darton was included in the calculation of the appellant’s annual bonus. The trial judge found that when Darton was sold, the appellant was paid a discretionary bonus. Although the appellant disputes the nature of the Darton bonus, the trial judge found that IAM, in its statements to its shareholders, characterized the bonus as discretionary.

[26] The second asset sale was the Ellerslie lands. The trial judge found that this investment was unusual, in that it was acquired prior to the commencement of the appellant’s employment with GPM, and was the only real estate investment held by GPM during the entirety of the appellant’s tenure. The trial judge accepted GPM’s evidence as to why this was the case: subsequent to purchasing the Ellerslie lands, GPM concluded that the acquisition of real estate investments put it in a conflict of interest with its investors. GPM made no further real estate investments. It did engage in other real estate transactions, but these were different in kind. The trial judge found that in these transactions, GPM earned a fee by securing agreements to purchase and then assigning its rights to third parties. On these deals, GPM had no intention and no ability to complete the purchases, let alone hold them as investments.

[27] Although the non-investment policy was not communicated to the appellant, and the appellant did not agree that the acquisition of the Ellerslie lands constituted a conflict of interest, the fact remains that during the entire course of the appellant’s employment, GPM did not acquire a single real estate investment. Thus the appellant had no expectation of further bonuses from capital gains in the future.

[28] The trial judge found that the appellant’s employment contract with GPM required that he be paid a bonus based on all of GPM’s income, including capital gains on real estate investments such as the sale of the Ellerslie lands, and not just operating income. GPM was therefore found to have breached its contract with the appellant. Did the trial judge nevertheless err by concluding that this breach was not a substantial alteration of an essential term of the contract?

[29] The appellant argues that the trial judge erred in not finding that GPM had converted the appellant’s overall bonus scheme from a non-discretionary bonus to a discretionary bonus, and that this constituted a substantial alteration of an essential term of the contract.

[30] The trial judge rejected this argument, and found that there had been no alteration to any term: the appellant’s duties and his compensation, including the bonus calculation, remained unchanged. The dispute between the appellant and GPM “amounted to a dispute over the interpretation of the application of one transaction to Mr. Chapman’s bonus scheme and nothing more.”

[31] The appellant argues that the trial judge erred in this conclusion because he considered the breach from the employer’s perspective rather than that of a reasonable employee: the trial judge made note of Johnson’s evidence that GPM thought it would be business as usual going forward, and that GPM intended all along to continue to be bound by the terms of the memorandum of understanding. The appellant argues that as these intentions were not communicated to him, they were unknowable by him, and a reasonable employee in his position, confronted with a denial of $329,000 in bonus income would have concluded that GPM had no intention to continue to be bound by the contract.

[32] The trial judge, however, made no such error…

[34] Furthermore, the trial judge considered all of the relevant surrounding circumstances in concluding that there were no other factors that could lead a reasonable person in the appellant’s position to conclude that GPM’s breach indicated an intention not to be bound by the memorandum of understanding.

[35] Against this, the appellant argues that the trial judge erred in not finding that he had been placed in the untenable position of having to either forego the $329,000 in bonus income and keep his job, or sue to recover the $329,000 and lose his job.

[36] The trial judge, however, found on the evidence that the appellant had options other than suing GPM on the one hand and foregoing the bonus on the other, including proposing arbitration and/or following up on Johnson’s suggestion that GPM might reconsider paying something towards a bonus if the other investors in the Ellerslie lands agreed.

[37] In my view, it was open to the trial judge to find that there were, on the facts of this case, dispute resolution alternatives that the appellant, a commercially sophisticated party, could have been expected to explore, and that a reasonable person in the appellant’s position would not have considered himself to have been constructively dismissed when the bonus on the sale of the Ellerslie lands was refused.

[38] 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 appellant’s argument that the respondents had converted the appellant’s bonus structure from non-discretionary to discretionary, and his finding that the disagreement over what constituted income for the calculation of the appellant’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 appellant’s employment contract, was reasonably open to the trial judge after a proper analysis and application of the first branch of the Potter test.

The appeal was dismissed with costs of $17,000 awarded to the respondent employer.

Commentary

I will confess to being somewhat surprised by this decision. I would have thought that the failure to make a $300,000 payment in accordance with the express terms of one’s contract, which failure was found to be a breach of contract, would have been sufficient to ground a pretty decent claim for constructive dismissal. I guess not.

What this case demonstrates is the real challenge of claiming constructive dismissal. After discussing this case with some colleagues, all with the benefit of hindsight, we guess that Mr. Chapman could have proposed arbitration while still employed, and if the employer refused, sued, while remaining employed, and then either collected on the breach or – if the employer fired him in response to the claim – ran the wrongful dismissal case at that time. Of course, hindsight is 20/20.

Takeaways for Employees with Labour Pains

The case is a cautionary tale for employees who may become offended by their employer’s failure to pay monies that are otherwise owed to them. Although the court has clearly said that “It is trite law that if an employer changes a fundamental term of employment, this may constitute constructive dismissal. It is difficult to imagine a more fundamental term of employment than that the employee be paid his or her salary.” (Martellacci v. CFC/INX Ltd., 1997 CanLII 12327 (ON SC)) I guess that’s not always the case.

If you are an individual looking for assistance with respect to some fundamental changes to the terms of your employment contract, contact the professional, experienced and cost-effective employment lawyers for employees at Ottawa's Kelly Santini LLP; we would be happy to be of service to you.

Takeaways for Employers with Labour Pains

The message for employers from this case is not that they can withhold bonus payments without triggering a constructive dismissal. Every case is unique and it is possible that difference judges would come to a different conclusion.

It should also be borne in mind that the employer in case lost, what I assume was, a highly valued employee and incurred considerable legal expense litigating this issue. It should have paid him the bonus right away and been done with it.

If you are an employer and you are looking for advice with respect to possibly making changes to the terms of your employee’s employment contracts, contact the professional, experienced and cost-effective employment lawyers for employers at Ottawa's Kelly Santini LLP; we would be happy to be of service to your business or organization.

Contact Me

To reach the author of this blog, Sean Bawden, email sbawden@kellysantini.com or call 613.238.6321 x260.

Sean P. Bawden is a partner with Kelly Santini LLP, located in Ottawa, Ontario, Canada. He practices in the areas of employment law and civil litigation. He has also taught Trial Advocacy for Paralegals and Small Claims Court Practice at Algonquin College in Ottawa.

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As always, everyone’s situation is different. The above is not intended to be legal advice for any particular situation. It is always prudent to seek professional legal advice before making any decisions with respect to your own case.

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