Constructive dismissal? A question of interpretation


Time Published on April 05, 2017 User Stringer LLP Admin

Would it be a constructive dismissal to refuse to pay an employee the third of a million dollars you owe him? Perhaps not.

In Chapman v. GPM Investment Management, the employee had worked for the company, which provided real estate management services, for nine years as its CEO and president. The terms of a 2008 memoranda of understanding set out the details of the bonus structure applicable to the employee for the subsequent three–year period.

When the employee met with the company’s CFO in 2011 to discuss the details of his bonus for that year, he learned that the company planned to exclude profit from the sale of some land it had purchased years earlier. According to the terms of the memoranda, the employee’s bonus was to be calculated on the company’s pre–tax income. Excluding the profits from the sale reduced his expected bonus by $329, 687.

The employee took the position that he had been constructively dismissed.

The trial judge found that the company had breached his contract by not including the profit from the sale in the employee’s bonus calculation. However, the judge found that this amounted to a dispute over the interpretation of the contract, not a unilateral change in the bonus structure by the employer.

The Ontario Court of Appeal upheld the trial judge’s decision.

The test for constructive dismissal

In order for a single, unilateral act on the part of an employer to constitute a constructive dismissal, two conditions must be satisfied: 1) the employer’s conduct must constitute a breach of the employment contract, and 2) the conduct must be found to substantially alter an essential term of the contract.

The first condition is objective, and the second is analyzed through the perspective of “a reasonable person in the same circumstances of the employee”. In other words, would a reasonable person in the employee’s situation have concluded that the employer’s conduct evinced an intention to no longer be bound by the contract?

The trial judge found that it was unusual for the company to hold assets such as land, and that the profit from the sale of land was also unusual for the company. Nevertheless, the trial judge found that the contract required the company to base the employee’s bonus on all of its income, not merely operating fees. As such, it had breached its contract with the employee.

However, the judge found that there had been no alteration to any term of the contract. The employee’s duties and compensation, including bonus calculation, had remained the same. The employee had testified that none of his duties would have changed, and that he fully expected to continuing receiving bonuses. A reasonable person in the employee’s circumstances would not have concluded that, based on this interpretive disagreement alone, the employer no longer intended to be bound by the contract.

The trial judge also found that the employee, as a sophisticated party, had options other than suing his employer or foregoing the bonus—he could have proposed arbitration, or pursued further discussion with his employer about the possibility of receiving some portion of the bonus.

The takeaway

The employee in this case acted hastily, and the employer prevailed against his constructive dismissal claim. However, the employer may have avoided the time and expense of litigation if the bonus agreement had contained clear, concise language.

There have been a number of recent, appellate–level decisions concerning bonuses and fringe benefits—most of which were decided in favour of the respective employee plaintiff. Employers should seek legal advice when drafting and amending contractual employment documents, including profit sharing plans.  Although the Court found for the employer, the analysis was highly fact–driven. Courts have found constructive dismissal in similar circumstances.

This blog was first published on First Reference Talks.

Tag constructive dismissal,  employment law


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