May 2, 2017
Does an employer’s failure to pay a $300,000 bonus constitute constructive dismissal?
Not according to Chapman v. GPM Investment Management, a recent decision from the Ontario Court of Appeal. Although there was no doubt that the employer had breached the employment contract by failing to pay the bonus, this conduct did not substantially alter an essential term of the contract going forward and thus did not constitute constructive dismissal.
The employee was employed by the defendant real estate management company for nine years as its chief executive officer and president and was also a director of one of its shareholders. According to his contract of employment, the employee was to receive a bonus calculated as a percentage of the company’s pre-tax income. In 2011, the employee was surprised to learn that the company planned to exclude from the calculation of its pre-tax income profit from the sale of lands that it had purchased several years earlier as an investment. The investment in land was a one-time event that would not be repeated later in the employee’s tenure. The exclusion of these profits decreased the employee’s bonus by $329,687. When the dispute over the bonus calculation was not resolved, the employee left his employment and sued for breach of his employment contract and constructive dismissal.
In order for a single act by the employer to constitute constructive dismissal, (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”. Although the first step is objective, the second considers whether a reasonable person in the same circumstances as the employee would have concluded that the employer’s conduct evinced an intention to no longer be bound by the employment contract.
The trial judge had found that the employer’s calculation of the bonus did constitute a breach of the employment contract and thus, met the first branch of the test. However, the essential terms of the contract had not been altered. The trial judge had rejected the employee’s submission that the overall bonus scheme had shifted from a non-discretionary bonus to a discretionary bonus, and that this constituted a substantial alteration of an essential term of the contract. Instead, the Court found that the dispute between the employee and the company “amounted to a dispute over the interpretation of the application of one transaction to Mr. Chapman’s bonus scheme and nothing more.”
Although the employee argued on appeal that the trial judge had mistakenly considered the matter from the perspective of the employer, who thought it would be business as usual going forward, the Court of the Appeal disagreed. It pointed to the employee’s own admission on cross-examination that he did not expect the terms of his employment to change in future.
The takeaway from this decision is that a disagreement over a term of the contract, even a term that can make a $300,000 difference, does not necessarily amount to constructive dismissal if a reasonable employee would not consider the essential terms of their employment to have been altered by the dispute. When considering the issue, it is necessary to consider the employment relationship as a whole, with a view to the future.
Chapman v. GPM Investment Management, 2017 ONCA 227