Breaching duties and cashing checks: An employee’s entitlement to bonuses after termination

October 14, 2012 - by: Northern Exposure 0 COMMENTS

by Marisa Victor and Christopher Copeland

Can a Canadian employee who is fired for cause sue for outstanding bonuses? What about if those bonuses relate to the period of the employee’s wrongdoing? This was the issue in Mady Development Corp. v. Rossetto, when a terminated executive sought to claim his bonuses for a period when he was found to be misappropriating company resources.

Facts

Leonard Rossetto was employed as an executive with a group of corporations (Mady). In fall 2007, he diverted labor, materials, and funds from Mady to renovate his house. He was fired on December 12, 2008, when Mady discovered his wrongdoing. Mady then sued him to recover the misappropriated corporate funds and resources. Rossetto counterclaimed for his bonuses for 2007 and 2008. Pursuant to his employment contract, he was entitled to an annual bonus equal to 30 percent of Mady’s profits after overhead. The parties ultimately submitted their dispute to arbitration.

In arbitration, Mady framed its claim as a breach of fiduciary duty. Mady took the position that because Rossetto was fired for cause, he wasn’t entitled to his bonuses. The arbitrator awarded Mady $315,452 in respect to the misappropriated resources and $231,000 to compensate for the delay that Rossetto had caused to Mady’s projects as a result of his wrongdoing.

However, the arbitrator also concluded that even a dishonest, dismissed employee is entitled to be paid for the work he has done. As a result, Rossetto was awarded $364,661 in satisfaction of his unpaid bonuses for 2007 and 2008.

Mady appealed the decision to the Ontario Superior Court. On appeal, the judge determined that errant fiduciaries forfeit entitlement to compensation in the form of bonuses and overturned the arbitrator’s decision to grant Rossetto his bonuses.
Rossetto then appealed the judge’s decision to the Ontario Court of Appeal. The Court of Appeal reversed the lower court decision and supported the arbitrator’s position. In the end, the Court of Appeal awarded Rossetto his bonuses.

Discretionary and fact-dependent remedy

The Court of Appeal determined that there were no authorities to support the principle that fiduciaries who breach their duties automatically lose their right to bonuses. Courts will address cases such as these on a case-by-case basis and will use their discretion to find the appropriate solution. In this case, the court found the facts relating to the nature and history of Rossetto’s bonuses to be particularly important.

The court acknowledged that there are different kinds of bonuses. Bonuses can be fixed, variable, or entirely discretionary. In Rossetto’s case, the bonuses were significant and nondiscretionary terms of his employment contract. They were an integral part of his compensation. The court went so far as to state that he was just as entitled to the bonus component of his compensation as he was to his regular salary.

Takeaway for employers

Canadian employers should always be conscious of the implications of including significant, nondiscretionary bonuses in employment contracts because these bonuses may be due even if the employee is fired for cause. If employers don’t want bonuses to be payable in such circumstances, they should take care to set that out in any bonus policies and the employment contract.

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