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Breaching unwritten terms in employment contracts can be constructive dismissal

Whitten and Lublin | Jul 03, 2013

In a recent case from British Columbia, the BC Court of Appeal confirmed the lower court’s judgment that failing to pay an employee their annual bonus can be constructive dismissal, even if the bonus was ostensibly discretionary and not a written term of the employment contract.

In Piron v. Dominion Masonry Ltd., the employee, Mr. Piron, was a 19-year veteran of the company. Initially, he was paid hourly, but after a few years his compensation was changed to a combination of hourly wages and a per-project bonus. These bonuses made up a significant portion of his annual income, typically being between $10,000 and $20,00, and in one year being as high as $90,000.

In his final year with the company, amid deteriorating economic conditions, the employer refused to pay Mr. Piron a bonus. After attempting to negotiate one, he was given an ultimatum: work for his hourly wage, or quit.

The employee took the position that this failure to pay him a bonus was a breach of the employment contract and that he had thus been constructively dismissed. His employer countered that the bonuses were purely discretionary, and did not form part of the employment contract.

 

Court’s decision on constructive dismissal

The Supreme Court of British Columbia (BCSC) sided with Mr. Piron, finding that the bonuses had become part of the employment contract. By unilaterally failing to pay the bonus to which Mr. Piron had become accustomed and was now entitled, the employer breached the employment contract and constructively dismissed Mr. Piron. The BCSC awarded him 15 months salary as damages in lieu of notice; however, the Court declined to award damages in respect of the unpaid bonuses.

On appeal, the BC Court of Appeal not only affirmed the constructive dismissal decision, but also increased the quantum of damages to reflect the unpaid bonuses, in light of the fact that Mr. Piron had become entitled to them under the employment contract.

 

Lessons on breaching unwritten terms in employment contracts

The lessons for employers and employees are clear: the consistent payment of bonuses can lead to their becoming part of the employment contract, even if they are not part of the written employment contract that the employee signed. More generally, the terms of an employment contract are not always limited to the written words of the contract; other terms can become part of the contract through the parties’ consistent behavior or demonstrated intentions. Unilaterally breaching the terms of an employment contract – including unwritten terms – will land the breaching party in hot water, regardless of external circumstances such as a declining economy. As this case has shown, breaching unwritten terms in employment contracts can be grounds for constructive dismissal.