Employers that decide to implement a profit sharing plan for employees should make sure that the terms of the plan are clearly spelled out. More often than not a dismissed employee will demand payment of this additional compensation upon termination of employment. Ultimately the employee’s entitlement will depend on the wording of the plan.
A recent decision from the British Columbia Court of Appeal, Nardulli v C-W Agencies Inc., illustrates the dangers of implementing informal compensation arrangements for employees.
The Plaintiff had been employed by the Defendant since 1986. His employment was not continuous, he had been fired for just cause in January 2006 but he was rehired in October of the same year. Upon his rehire his role was changed from Vice President Operations to Manager of Operations.
The company was in the business of international marketing and resale of lottery tickets purchased in Canada to purchasers located outside of Canada. The company had one sole shareholder, Randall Thiemer, who died in 2008. In 2000, Thiemer announced that he was implementing an employee profit sharing plan. A draft plan was prepared however it was never formalized or implemented.
When the plaintiff was rehired in October 2006, Thiemer provided him with $150,000 for home furnishings and to help pay for a drug rehabilitation program. He also purchased a home for the plaintiff for a total of $895,000. Around the time that the plaintiff received these payments, other employees received lump sum payments from Thiemer ranging from $250,000 to $400,000, some of which were noted to be profit draws.
In September 2008, the Plaintiff was informed that he was not entitled to payments under the company’s alleged profit sharing plan. The Plaintiff was asked by the company to sign a release indicating that he waived all rights to share in the company’s profits. The Plaintiff refused and commenced a legal action against the company. Shortly thereafter he was terminated for just cause due to a variety of performance related issues.
At trial, the plaintiff was awarded $262,500 in damages for wrongful dismissal. The trial judge determined that the plaintiff was owed $1,332,149 for the profit sharing plan. The $895,000 that was paid to the plaintiff by the defendant was determined to be a gift and was not taken into account when determining his profit sharing entitlements. The trial judge found that although the profit sharing plan was never formally implemented, Thiemer made oral representations to the plaintiff that were intended to be binding. She determined that this created an expectation of a profit sharing plan that crystallized into an entitlement when the plaintiff and other employees received payments in 2006 which were described as profit share.
The British Columbia Court of Appeal overturned the lower court decision pertaining to the profit sharing. The proper question to ask was not whether the plaintiff had a reasonable expectation of a profit sharing plan but whether the company was under a legal obligation to pay profit share. It found that the defendant never implemented the draft profit sharing plan, and as such, the plaintiff was not entitled to payment in accordance with the plan. No employee had ever been paid anything that resembled the bonus contemplated in the draft plan and the trial judge never made a finding that the plan was actually implemented.
The Court of Appeal did find that the company had provided discretionary bonuses. This determination was based on the 2006 payments made to employees as well as evidence provided by Thiemer’s chartered accountant who was instructed by Thiemer before his death to review the amounts paid to employees in 2006 so as to achieve “parity” among the employees. The payments were characterized by the accountant as bonus payments. The court found that this provided sufficient evidence that a discretionary bonus was a term of employment.
The court determined that the company properly exercised its discretion in declining to provide the plaintiff an additional discretionary bonus in 2008. The court found that the company took into consideration the payments provided to the plaintiff in 2006 when determining whether he was entitled to a further bonus. Otherwise, the plaintiff would have received an amount that was completely out of proportion to payments received by other employees, as he had received a sum that was exceedingly larger than any other employee in 2006.
The court did not interfere with the lower court decision that there was no just cause for the plaintiff’s termination, and upheld the damages award for wrongful dismissal.
Although aspects of this case are unusual, it does remind employers of the importance of clearly setting out the terms of any profit sharing plan provided to employees. An employee’s compensation structure should be outlined in an employment contract, along with entitlements upon termination of employment. A dismissed employee’s entitlement to profit sharing will likely come down to the wording of the plan. A plan that requires employees to be employed at the end of the entitlement year will likely be enforceable against an employee dismissed prior to year end. However, in the absence of limiting language, a court will likely side with the dismissed employee and award damages for profit sharing amounts specified in the plan.