Bonus payments and constructive dismissal

A British Columbia company’s unilateral decision to stop paying bonuses to an employee in light of the economic downturn amounted to constructive dismissal, the British Columbia Supreme Court recently held.

In a ruling that emphasized the bilateral nature of negotiating employment terms, the Court found that the company’s decision to stop bonus payments – which made up a significant portion of the employee’s income – ran contrary to its previous practice of negotiating the payments with the employee and thus constituted constructive dismissal.

The ruling in Piron v. Dominion Masonry Ltd. 2012 BCSC 1070 (CanLII) serves as a reminder that significant conditions surrounding employment, even if not contained in a written contract, must be negotiated between both parties if they have a history of negotiation. This can even apply to something such as bonuses, which employers can mistakenly see as an incentive that they can unilaterally remove.

In Piron, the employee, a foreman at a masonry company, had been receiving bonuses since at least 2005 in connection with his work on individual projects. The bonuses made up anywhere from 10 to 50 per cent of the foreman’s gross pay and were agreed upon by the foreman and the company each time they were paid.

When the economic downturn resulted in less work, the company refused to answer the foreman’s requests to continue negotiating bonuses for subsequent projects, leading to a significant drop in his compensation. The company’s unilateral decisions to stop paying and negotiating bonuses led to the foreman’s constructive dismissal, the Court held.

While the company argued the bonus payments were discretionary, the Court found they were measured “to reflect the significance of the work being done and to satisfy the senior employees so that they were content to continue in their employment.” Moreover, the economic downturn was not a justification for unilaterally ceasing bonus payments: “Economic circumstances can lead to a substantial change to an employment contract, but the process is through negotiation, not unilateral imposition of lower compensation.”                                  

Based on the foreman’s 19 years of service with the company and the fact the foreman was less likely to find another job in the same position, the Court granted the foreman 15 months of severance pay. 

The Court’s ruling shows that even when dealing with things that may seem like perks, such as bonuses or the use of a vehicle, an employer looking to protect itself must clearly list the terms of employment in the contract and avoid making unilateral decisions if the past practice has been to negotiate terms with the employee.  Furthermore, if bonuses make up a significant portion of an employee’s income or are paid out based on certain criteria (and are therefore not discretionary), they can be seen as part of the employee’s salary and thus incapable of being unilaterally altered by the employer.

In collaboration with Joel Kom, student at Norton Rose Canada LLP