Bonus depends on contract, context
An employee could be forgiven for thinking that having their compensation cut by more than $ 300,000 meant they had been constructively terminated.
According to a recent decision by the Ontario Court of Appeal, however, that employee might be very wrong.
Brent Chapman was CEO and president of GPM Investment Management, a real estate management company. As part of his compensation package, he was supposed to receive an annual bonus of 10 per cent of the pre-tax profits.
For nine years, his employment proceeded without incident. In 2011, however, he was told that GPM was going to exclude profit from a sale of land in calculating his bonus, reducing his remuneration by $329,687.
Chapman walked away from GPM, alleging that the denial of this bonus amount meant he had been terminated. GPM, as any employer would, argued that he had resigned.
Six years and considerable litigation later, GPM emerged victorious when the Court of Appeal held Chapman had not been constructively terminated. (If an employer materially changes a fundamental term of the job, such as cutting the salary or drastically reducing work hours, the employee can assume that the employer does not intend to be bound by the contract, walk out the door and sue for wrongful dismissal.)
Chapman claimed constructive dismissal, claiming the denial of the expected $ 329,687 bonus was such a breach. Though the court decided the denial was a breach of his contract, it wasn’t a breach of an “essential term.”
Considering Chapman’s base salary was $ 240,000, it would seem puzzling to anyone that the loss of over $ 300,000 in compensation — i.e. over 100 per cent of his base salary — wasn’t an essential term.
However, there are other factors to consider: ❚ The bonus was discretionary, making it GPM’s choice to award it or not; ❚ Chapman agreed his duties did not change, his base salary had not changed and that he expected to be paid bonuses in future; ❚ That particular sale of lands was an unusual situation for GPM, and; ❚ Chapman had other options, such as arbitration, or determining whether GPM would pay something of a bonus regardless, rather than leaving his job and suing.
So what does this mean for the rest of us?
Employees should seek legal advice whenever there is a substantial change in their employment situation. Constructive dismissal can be complicated, so a lawyer should assess the case. Further, a loss of a bonus, particularly a discretionary bonus, isn’t the same as a cut to other sources of employment compensation, and employees should be aware that the rightness of making such a cut depends on the context and contract.
Employers should make it clear that bonus payments are at their discretion and ensure there is evidence that employees have been informed of any policies at the heart of them. This is particularly true for complicated incentive-based bonus plans that are linked to company productivity. And when modifying employee compensation, employers should consult legal counsel in order to make sure the change is implemented properly and doesn’t put the employer at risk of a large severance liability.