THE EMPLOYERS' EDGE
Employer’s Unilateral Change to Bonus Structure can result in Wrongful Dismissal
It should be plain and obvious that an employer has the right to manage its business as it sees fit. That includes managing its employees as it sees fit, in the interest of business. However, there are some exceptions to this general principle. While an employer is free to manage its employees, the employer must keep in mind that it is a party to an employment contract with each of its employees. The law is clear that the contract need not be in written form, and its terms and conditions apply to both the employer and employee to honour it. This means that if one party makes a unilateral change to a fundamental term of the employment contract, that contract is breached. When it is the employer who breaches the employment contract by making a unilateral change to the employment contract, and that change is to the employee’s detriment, the employee may be entitled to resign from employment and bring an action against the employer for wrongful dismissal. This briefly describes the common law concept known as “constructive dismissal”.
A constructive dismissal often occurs in the context of a change of duties for an employee that diminishes their responsibility, prestige, or remuneration. The motive behind the employer’s unilateral change has no bearing on the finding of whether it had committed a constructive dismissal.
For example, in Piron v. Dominion Masonry Ltd., 2012 BCSC 1070, a recent case from the British Columbia Supreme Court, a construction company’s former employee claimed that he was constructively dismissed when the employer unilaterally ceased payments arising from a bonus pay structure that the parties had negotiated previously. The employer’s action was precipitated by poor economic conditions and seemed necessary from a business standpoint. Piron was in receipt of substantial bonuses to supplement his base earnings in 2005 through 2007. In 2008 and 2009 when Piron was needed to head up a major project, the company pledged him bonuses of $90,000 and $50,000 respectively, bringing his gross earnings to $184,323.94 and $141,729.73 in those two years. After the completion of that project, the employer did not pay any further bonus to Piron, largely as a cost-saving measure. Piron’s total income for 2010 and the first half of 2011 was $70,522.16 and $42,767.11 respectively. Piron resigned his employment and sought wrongful dismissal damages by claiming that Dominion breached the employment contract by repudiating the existing bonus structure.
The Court agreed with Piron, finding that the ability to negotiate a higher rate of pay through a bonus structure had been a term of Piron’s employment since 2005, leading to significant income. Dominion therefore unilaterally and substantially changed a fundamental term of the employment contract when it ceased to pay bonuses. The Court ruled that this constituted a constructive dismissal, and Piron was awarded wrongful dismissal damages in the amount of $106,250.00.
This is not the first case in which an employee has claimed that alteration to their bonus structure constituted constructive dismissal, and employees are not always successful in making these kinds of claims. What was significant in the Piron decision was the amount by which Piron’s pay decreased. Where the employer unilaterally decides not to pay out a discretionary bonus of a much more modest and nominal amount, a Court is less likely to find that the affected employee has been constructively dismissed.
If you are considering a unilateral change to your employees’ remuneration, or other terms of employment, even if it is only in response to economic or business factors, you might find yourself on the wrong side of a wrongful dismissal complaint. Employers are well-advised to avoid making unilateral changes to terms of employment contracts without the express agreement of the affected employees. The lawyers of Crawford Chondon & Partners LLP have considerable experience and expertise in these kinds of matters and can advise on whether the change you may be considering could give rise to a constructive dismissal complaint, and if so, how to achieve your goals in a fair way that will accord with the law and not offend your employees.
Please Note: This blog has been prepared as an informational service for our clients and other interested parties. It is not intended to constitute legal advice, a complete statement of the law or opinion on any subject. Although we endeavour to ensure the accuracy of the content, no one should act upon the information provided without a thorough examination of the law after the facts of a specific situation are fully considered.