Some employees receive a large percentage of their total compensation in variable compensation.
A much litigated issue is whether the employer is required to pay variable compensation to a terminated employee during the applicable notice period and if so how is this compensation calculated.
In a recent case the Ontario Court of Appeal (“OCA”) considered whether an employee who claimed constructive dismissal was entitled to a bonus and a shareholder bonus during the applicable notice period. This case illustrates the kind of litigation risk that arises in these kind of cases.
Ms. Evans, a salesperson and a minority shareholder in Paradigm Capital Inc., was offered a demotion which she refused after about 5 years service at the age of 44. She earned a salary of $75 000, was eligible for a bonus, and as a minority shareholder she was entitled to receive a shareholder bonus.
The trial judge concluded Ms. Evans was not required to accept a lesser position, and was constructively dismissed and was entitled to about $69 000 pay in lieu of 11 months notice. He also awarded Ms. Evans a bonus of $86 771.21 and $79 792.58 for the shareholder bonus during this notice period. He also ordered the employer to pay Ms. Evans. $ $195 412.59 towards her legal costs.
Court of Appeal Decision
Constructive Dismissal – The OCA agreed that the employee was constructive dismissed. There is much litigation risk on this issue because if the court didn’t conclude Ms. Evans was constructively dismissed then she would have been awarded no termination pay.
Notice Period – The OCA refused to interfere with the 11 month notice period. There is much litigation risk on this issue because a judge has much discretion when determining the appropriate notice period. I suspect some judges would have found a notice period as little as five months in this case.
Failure to Mitigate – The OCA refused to interfere with the trial judge’s decision that it was reasonable for Ms. Evans to refuse a demotion. If the court concluded Ms. Evans should have taken the demotion then she would have been entitled to little (if any) damages.
Bonus – The OCA refused to interfere with the judge’s decision to calculate the bonus based on what she would have earned during the notice period as opposed to an average of the bonus she earned in the three years prior to her termination. I believe many other judges would have calculated the bonus based on Ms. Evan’s historical bonus’ which would have been a much higher amount.
Shareholder Bonus – The OCA overturned the trial judge’s decision to award Ms Evans a shareholder bonus during the notice period because she was required to sell her shares when her employment was terminated under a shareholder agreement.
Lessons to Be Learned
- It does not make much (if any) financial sense to litigate most wrongful dismissal and constructive dismissal cases where no employment contract exists. In this case, the employer was ordered to pay a five year employee earning $ 75 000 a year about $ 155 000 in damages plus more than this amount for her legal fees. Cases with much litigation risk like this one should be settled in mediation if not before if at all possible.
- An employment contract can reduce or eliminate most litigation risk in connection with employee terminations. In this case, the contract could have given the employer the right to change the employee’s duties, and established an agreed upon notice period.
- All variable compensation plans should clearly state whether or not the employee is entitled to any variable compensation after the employee’s last day of active employment and if so how this compensation is calculated.
For 30 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him directly at 416-317-9894 or at [email protected]