Terminated without notice: are discretionary bonuses part of the severance package?

| August 15th, 2017 | No Comments »

Bonuses may make up a significant portion of pay for executives, senior managers, and other high skilled employees. Upon termination of the employment relation, notice or pay in lieu is meant to place an individual in a similar place had they not been terminated. Pay in lieu is refereed to as ‘notice pay’. Notice pay is how the courts determine the amount of pay in damages that an employee that was denied reasonable notice is owed. Consistent with this principle, discretionary bonuses may need to be included in an employee’s a severance when choosing no to give notice of termination.

Discretionary Bonuses

A discretionary bonus, by definition, is awarded at the employer’s will without objective criteria. When included in an employment contract, discretionary bonus will clearly specify that the bonus is solely to the determination of the employer and may or may not be granted. Employers often will argue that since the bonus is discretionary, it should not have to be included in notice pay. However, there are scenarios where discretionary bonuses will be included as damages by the courts when assessing the amount of notice pay the employee is owed.

Discretionary Bonuses and Notice Pay

When the employee has been with the employer for many years and the bonus was paid regularly, it is likely to be included in the notice pay, especially if it composed a significant portion of the employee’s total compensation. The less often and regular the bonus was paid, the greater the chance the bonus will not be included in the notice pay. Further, courts have also determined that if current employees of a similar position and status receive a discretionary bonus, the terminated employee must also receive the payment of the discretionary bonus in their notice pay.

Final Remarks

Overall, it is important for the discretionary bonus clause to be unambiguous because any difficulty in interpretation will fall in the employee’s favour. In addition, where the bonus is labeled as discretionary in the employment contract, but in practice is subjected to objective criteria, the courts will not view this as discretionary. When dealing with executive type compensation, properly drafted contracts and practices are very important. What was initially thought to be an agreed upon contact may end up being very costly for an employer. it is advisable to seek legal expertise when drafting contracts that seek to define the limits of severance payment with regards to discretionary bonuses.

Can a Non-Payment of a Bonus Trigger Constructive Dismissal?

| February 24th, 2017 | No Comments »

In the case of bonus pay, would a disagreement over the entitlement, and subsequently a non-payment, be enough for an employee to claim constructive dismissal? When an employer changes an essential term of an employment contract without the consent of the employee, this is a unilateral change and would warrant a constructive dismissal claim. This means that the employee had no reasonable alternative but to walk away from the job. This requires a fundamental change to the terms of employment such as pay and responsibilities. The remedy sought would be damages in the form of ‘notice pay’.

This, of course, is circumstantial. Important factors include the amount of the bonus in question. If the bonus makes up a large proportion of the employee’s pay and is guaranteed, then a failure of payment would more likely result in a successful constructive dismissal claim. Alternatively, if the bonus was a small amount with no other alteration to the employment contract, a constructive dismissal claim will unlikely be successful. A 2016 Ontario Superior Court case of Chapman vs GPM Investment Management (the company) deals with exactly this.

In this case, Chapman was the CEO and President of GPM. Chapman felt he was entitled to a bonus of 10% of profits made off the sale of an asset (property) for which GMP was involved. GPM disagreed over this 10% bonus because they claimed the gains made did not fall under the definition of ‘profit’ as defined in the employment contract. Chapman quit and claimed constructive dismissal in addition to payment for the 10% bonus he felt was owed. The Ontario Superior Court found that Chapman was entitled to this bonus, however, the failure to make this payment was not enough to trigger constructive dismissal.

The reasons the court did not find this to be constructive dismissal was due to a few reasons: the bonus was not much compared to Chapman’s overall compensation, the terms of the employment contract (the bonus structure) were not altered, and the employer intended to continue  honouring the employment contract in the future. The disagreement was also over a particular type of asset that the employer was never going to deal with again, thus making this a one-time isolated event. Overall, the circumstances here did not fundamentally change the conditions of employment, and therefore did not amount to a constructive dismissal. In addition, the employer here gave Chapman options to peacefully resolve the issue.

If there is a concern over an issue regarding the payment of a bonus, it is important to attain legal advice. The issue may involve a disagreement over the interpretation of an employment clause, which requires a wholesome approach – it is often not enough to only consider the clause in question. For both employers and employees, it is advisable to seek legal assistance in determining the appropriate remedies.

Breaching unwritten terms in employment contracts can be constructive dismissal

| July 3rd, 2013 | No Comments »

In a recent case from British Columbia, the BC Court of Appeal confirmed the lower court’s judgment that failing to pay an employee their annual bonus can be constructive dismissal, even if the bonus was ostensibly discretionary and not a written term of the employment contract.

In Piron v. Dominion Masonry Ltd., the employee, Mr. Piron, was a 19-year veteran of the company. Initially, he was paid hourly, but after a few years his compensation was changed to a combination of hourly wages and a per-project bonus. These bonuses made up a significant portion of his annual income, typically being between $10,000 and $20,00, and in one year being as high as $90,000.

In his final year with the company, amid deteriorating economic conditions, the employer refused to pay Mr. Piron a bonus. After attempting to negotiate one, he was given an ultimatum: work for his hourly wage, or quit.

The employee took the position that this failure to pay him a bonus was a breach of the employment contract and that he had thus been constructively dismissed. His employer countered that the bonuses were purely discretionary, and did not form part of the employment contract.

 

Court’s decision on constructive dismissal

The Supreme Court of British Columbia (BCSC) sided with Mr. Piron, finding that the bonuses had become part of the employment contract. By unilaterally failing to pay the bonus to which Mr. Piron had become accustomed and was now entitled, the employer breached the employment contract and constructively dismissed Mr. Piron. The BCSC awarded him 15 months salary as damages in lieu of notice; however, the Court declined to award damages in respect of the unpaid bonuses.

On appeal, the BC Court of Appeal not only affirmed the constructive dismissal decision, but also increased the quantum of damages to reflect the unpaid bonuses, in light of the fact that Mr. Piron had become entitled to them under the employment contract.

 

Lessons on breaching unwritten terms in employment contracts

The lessons for employers and employees are clear: the consistent payment of bonuses can lead to their becoming part of the employment contract, even if they are not part of the written employment contract that the employee signed. More generally, the terms of an employment contract are not always limited to the written words of the contract; other terms can become part of the contract through the parties’ consistent behavior or demonstrated intentions. Unilaterally breaching the terms of an employment contract – including unwritten terms – will land the breaching party in hot water, regardless of external circumstances such as a declining economy. As this case has shown, breaching unwritten terms in employment contracts can be grounds for constructive dismissal.