April 13, 2017

Agree to Disagree: No Constructive Dismissal Where Employer Wrongfully Withholds $329,687 from Employee

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The Ontario Court of Appeal has offered employers some solace in handling disputes with employees over the proper interpretation of the employment contract. In the recent decision of Chapman v. GPM Investment Management, 2017 ONCA 227, the Court of Appeal upheld the lower court’s decision which had found that no constructive dismissal occurred when the employer withheld a substantial bonus payment to the employee based on the employer’s erroneous interpretation of the employment contract.

Background

Chapman was employed as the President and CEO with GPM Investment Management and Integrated Asset Management Corp. (the “Employer”), a real estate management company. Over the course of his employment, Chapman had signed several memoranda of understanding which set out the terms of his employment. The latest of these, signed in November of 2008, provided Chapman with an annual bonus entitlement to be calculated as “10% of pretax profit” of both the Employer and a related company, less interest income and depreciation (the “Bonus”).

While the Employer’s ordinary business was the generation of fees from its real estate management services, it was also the largest shareholder of a real estate investment company whose only asset was land located in Edmonton, Alberta. In May of 2011, this real estate investment company sold its interest in the land and paid a significant dividend to the Employer (the “Real Estate Profits”).

When the time came to calculate Chapman’s Bonus, the Employer did not include the Real Estate Profits in the calculation, taking the position that only those profits made in the ordinary course of the Employer’s business ought to be considered. Excluding the Real Estate Profits from the calculation had the effect of reducing Chapman’s Bonus by $329,687.

In response, Chapman resigned and brought an action for both the unpaid Bonus amount and damages for constructive dismissal.

Chapman was successful at the Ontario Superior Court of Justice in his argument that the Employer had mis-interpreted the Bonus provision of his employment contract, and was awarded the $329,687 which should have been paid to him. However, he was unsuccessful in his claim of constructive dismissal, and appealed this finding.

Decision on Appeal

The Ontario Court of Appeal determined that, to be successful in his claim of constructive dismissal, Chapman had to show that:

  1. the Employer’s refusal to include the Real Estate Profits in his Bonus calculation breached an essential term of Chapman’s employment contract; and
  2. that a reasonable person, in the same circumstances as Chapman, would have concluded that the Employer’s conduct evinced an intention to no longer be bound by the employment contract.

There was no question that Chapman had met the first step, as the Employer did not contest on appeal that it had in fact breached Chapman’s contract of employment by failing to include the Real Estate Profits in the calculation of his Bonus.

On the second step, however, the Court held that the withholding of the $329,687 rightfully due to Chapman was not in and of itself sufficient to meet the constructive dismissal threshold. Central to this conclusion was the fact that the Employer had no other real estate investments at any time during Chapman’s employment and, as a result, had not realized profits from any of those investments. The Real Estate Profits were therefore a highly unusual occurrence which gave rise to a bona fide dispute as to the proper interpretation of the Bonus provisions in Chapman’s employment contract.

Given these unique facts, the Court found that a reasonable person in Chapman’s shoes would not have concluded that the Employer’s decision to withhold the additional Bonus amounts represented a substantial alteration of an essential term of the employment contract. Rather, this was simply a genuine dispute between the Employer and Chapman as to the proper interpretation, and thus calculation, of Chapman’s Bonus.

What This Means for Employers

This decision is good news for employers who find themselves in disputes with their employees as to the proper interpretation of the employment contract. The Court reiterated that there is a fine distinction between the unilateral alteration of an essential term of the employment contract, on the one hand, and a bona fide disagreement as to its interpretation on the other.

In addition, where such a bona fide disagreement arises, the Court’s decision suggests that an employer may proceed to enforce its own interpretation of the employment contract without necessarily being liable for constructive dismissal, even if the employer’s interpretation is ultimately determined to be incorrect. This conclusion, however, will likely depend heavily on the unique facts of each case.

A cautionary note, however, in dealing with employees who commence legal action to enforce their own interpretation of the employment contract. Given the Court’s finding that such interpretive disputes do not necessarily suggest an intention to no longer be bound by the employment contract, employees may be permitted to bring such actions while remaining employed. It would be wise to seek legal counsel before taking disciplinary steps against such an employee.

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Agree to Disagree: No Constructive Dismissal Where Employer Wrongfully Withholds $329,687 from Employee

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