A recent Ontario Superior Court of Justice (the “ONSC”) decision serves as a reminder that repeated failures to pay earned compensation can amount to constructive dismissal, particularly where the unpaid amounts form a significant part of the employee’s compensation.

In Kirchmair v EXP Global Inc. [Kirchmair], the ONSC found that an employer constructively dismissed a senior employee by repeatedly delaying and withholding non-discretionary bonus payments owed under his employment agreement. The Court also awarded significant moral damages, finding that the employer’s conduct leading up to the constructive dismissal breached its duty of good faith.

Background

The employee was a senior executive whose compensation included a base salary and a unique non-discretionary bonus structure tied to business generated from a major client. Under the employee’s amended employment agreement, the employer was required to pay two types of bonuses by specific deadlines: success bonuses, payable after certain contract renewals or extensions, and annual bonuses, payable by a fixed annual date.

Despite these clear contractual deadlines, the employer repeatedly paid the employee’s bonuses late—sometimes months after they were due. Certain bonuses remained unpaid altogether, including some that had remained outstanding for years by the time of trial.

The employer also sought to transition the employee to a different bonus structure. The ONSC found that, while the employer was entitled to propose amendments to the employee’s compensation structure, it could not use delayed or unpaid bonus payments as leverage to pressure the employee into accepting less favourable compensation terms.

The employee ultimately treated the employer’s conduct as a constructive dismissal and brought a claim for unpaid bonuses, contractual termination pay, moral damages, and punitive damages.

Decision

The Court found that the employee had been constructively dismissed.

In reaching this conclusion, the Court emphasized that the timing and payment of the employee’s non-discretionary bonuses were fundamental terms of the employment agreement. The bonuses were not discretionary or incidental; they formed a significant part of the employee’s compensation and were expressly tied to specific payment deadlines.

The Court rejected the employer’s argument that the employee had acquiesced to the late payments. Although the employee had continued working despite past delays, he had repeatedly followed up, requested payment, and objected to the employer’s failure to comply with the agreement.

The Court also found that the employer acted in bad faith. The employer knew that timely payment of the bonuses was important to the employee, repeatedly failed to meet its contractual obligations, and tied payment of bonuses already owing to ongoing discussions about changing the employee’s compensation structure. The Court found that it was foreseeable that this conduct would cause mental distress.

As a result, the Court awarded the employee unpaid bonuses of $148,670.23, vacation pay of $14,867.02, damages of $382,000 pursuant to the termination provisions of his employment agreement, and moral damages of $150,000. The Court declined to award punitive damages, finding that although the employer acted in bad faith, its conduct did not rise to the level of malicious, vindictive, or high-handed misconduct required for punitive damages.

Takeaways for Employers

Kirchmair provides several important reminders for employers regarding compensation practices and the duty of good faith:

• Compensation changes can create constructive dismissal risk: Repeatedly delaying or withholding earned compensation may amount to a fundamental breach of the employment contract, especially where the compensation forms a significant part of the employee’s remuneration.
• Condonation is not automatic: An employee who continues working after late payments does not necessarily accept a new payment practice. Repeated objections, follow-ups, and requests for payment may undermine any argument that the employee acquiesced to the change.
• Bonus terms should be clear and honoured: Where a bonus is non-discretionary and tied to specific formulas or payment dates, employers should ensure they have systems in place to calculate and pay amounts accurately and on time. While employers may propose changes to compensation terms, they should not delay payment of earned wages while negotiating those changes.
• Bad faith can significantly increase liability:  An employer’s conduct in administering employee compensation and fulfilling its contractual obligations may support a substantial moral damages award.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.