April 18, 2017
A recent decision of the Ontario Court of Appeal serves as a good reminder of an important point made in Chapter 15 of The Law of Work [“You Forced Me to Quit: The Special Case of Constructive Dismissal”). That point is this: Sometimes a breach of contract by the employer, even one involving hundreds of thousands of dollars, is just that–a breach of contract–and not a constructive dismissal.
Recall that a constructive dismissal arises when an employer commits a fundamental breach
of contract, or otherwise engages in behaviour that demonstrates that the employer no longer intends to be bound by the employment contract, and the employee responds by quitting and treating the contract as having been terminated by the employer’s actions. A constructive dismissal is a special species of “wrongful dismissal”, because the employee is arguing in essence that he/she has been terminated by the employer without proper notice of termination.
Facts in Chapman v. GPM Investment Management (2017)
In Chapman v. GPM Investment Management , the employee (Chapman) quit and sued for constructive dismissal after the employer refused to pay him a bonus of nearly $330,000. That amount related to his share of profit earned by the employer on the sale of certain property. Chapman’s employment contact included a clause entitling him to a bonus calculated based on 10% of the employer’s of pre-tax profit. The employer’s position was that the profit earned from the property sale was excluded from the calculation of Chapman’s bonus.
Did the Employer Breach the Employment Contract?
The trial judge ruled that the employer had breached the contract by not paying Chapman the $330,000 bonus, since the contract was clear that Chapman’s bonus was to be calculated based on company profits, including profit from the disposition of the property. Therefore, Chapman was entitled to damages in the amount of the unpaid bonus.
Did the Breach Give Rise to a Constructive Dismissal?
However, the more tricky question was whether the employer’s breach amounted to a constructive dismissal. If so, then Chapman was also entitled to damages based on a failure by the employer to give reasonable notice, which the court ruled it would have set at 18 months. The trial judges ruled that a constructive dismissal has not occurred, and the Court of Appeal agreed.
The Court of Appeal summarized the test for a constructive dismissal, as developed in the Supreme Court of Canada decision in Potter v. New Brunswick Legal Aid Services Commission, as follows:
.. there are two routes that a plaintiff can follow to establish constructive dismissal, as set out in Potter v. New Brunswick Legal Aid Services Commission…
The first branch is apt where an employer has, by a single unilateral act, breached an essential term of the contract of employment. The second branch allows for constructive dismissal to be made out where there has been “a series of acts that, taken together, show that the employer no longer intended to be bound by the contract”. On both branches, it is “the employer’s perceived intention no longer to be bound by the contract” that gives rise to the constructive dismissal: Potter, at para. 43.
The first branch – for a single unilateral act – has two steps: (1) the employer’s conduct must be found to constitute a breach of the employment contract, and (2) the conduct “must be found to substantially alter an essential term of the contract”: Potter, at para. 34.
The perspective shifts during the analysis. In ascertaining whether an employer’s conduct has amounted to a breach of contract (the first step of the first branch), the test is objective: Potter, at para. 62. Thereafter, on both the second step of the first branch and on the second branch, the perspective shifts to “that of a reasonable person in the same circumstances as the employee…The question is whether, given the totality of the circumstances, a reasonable person in the employee’s situation would have concluded that the employer’s conduct evinced an intention to no longer be bound by [the contract]” (emphasis in original): Potter, at para. 63. In these parts of the analysis, the trial judge must conduct the enquiry from the perspective of the reasonable employee. This perspective excludes, for example, reliance on information that “the employee did not know about or could not be expected to have foreseen.” Potter, at paras. 62 and 66. Furthermore, the employee is not required to establish that the employer actually intended to no longer be bound by the contract, but only that a reasonable person in the employee’s situation would have concluded that this was the employer’s intention.
In Chapman, the Court ruled that while the employer had breached the contract in refusing to pay the bonus, a “reasonable employee in the same circumstances as the employee” would not have concluded that the employer no longer intended to be bound by the contract. What we had here was a disagreement about the application of one term of the contract, but the employer never acted in a manner that suggested it no longer intended to be bound by the contract moving forward. Moreover, Chapman agreed in evidence that he also believed that had he not quit the employment relationship would have just continued on as normal.
What Should Chapman Have Done?
The Court ruled that the employer had breached the contract by refusing to pay Chapman his $330K bonus payment and the employer was ordered to pay damages in that amount to compensate Chapman for the breach. Since Chapman had not been constructively dismissed, he was not entitled to damages based on the employer’s failure to provide him with reasonable notice of termination.
At trial, Chapman argued that when the employer refused to pay the bonus, “that he was left in a position such that he would have had to sue his employer, and thus would be in the untenable position of having to leave his employment”. It’s not clear to me whether Chapman was claiming that he could not legally sue for recovery of the bonus while continuing to work, or whether it would be untenable to do so, or whether if he sued, the employer would simply have terminated him. In any event, the Court rejected Chapman’s claim that the only option he had to recover his bonus was to quit and sue for constructive dismissal.
This last point is interesting for employment law students. If you were advising Chapman, and you concluded that he would likely not win a constructive dismissal lawsuit, what advice would you give him to ensure that he is able to recover his bonus?
Once you have considered your answer, read how the courts respond to this question.
In the lower court ruling, read paragraphs 22, 26, and 67.
In the Court of Appeal ruling, read paragraphs 35-37.