Fired employee entitled to bonuses

Frederik Chann was a high-stakes dealmaker, so it should have been no surprise that he rejected the $325,000 settlement he was offered when he was fired.

Chann’s gambit paid off recently. He won his lawsuit against his former employer, and an Ontario Superior Court judge ordered RBC Dominion Securities to pay almost $750,000.

The number of zeros attached to Chann’s wrongful dismissal payout may be limited to the upper echelons of Canadian employees but the Court’s legal findings about bonuses owing to fired employees apply more broadly. The result: Employers and workers of all descriptions and levels must take notice.

Chann’s 10-year stint as an RBC investment banker began after he graduated on the Dean’s List from MBA school. Affable and ambitious at RBC, the Court noted Chann “was well-liked, was a loyal, conscientious and competent employee and was well-regarded.” Climbing to the level of director, Chann took home a base salary of $125,000 plus substantial bonuses. Fired at the age of 38, he earned more than $500,000 in each of the three previous years.

By 2001, the investment banker’s star did not shine as brightly, and RBC raised a red flag about Chann’s marketing skills. So, despite being awarded a discretionary bonus of $250,000, RBC warned Chann that his career was in jeopardy if he did not initiate more deals. Although he soon drummed up more work, the bank fired him without cause within the year.

RBC made an apparently reasonable severance offer, proposing $125,000 as the cash bonus for 2002, plus $200,000 as pay in lieu of notice. Chann balked, however, citing this relatively paltry bonus compared with past years, the higher amounts paid to those not fired, and the lack of bonus during the notice period.

The Court’s decision in Chann’s favour turned on the wording of the bonus plan. While RBC had “discretion” to pay employee bonuses, the judge emphasized that the bank’s own documents obliged the company to dole out bonuses “in accordance with past practice.” The result: Once the size of the investment bankers’ bonus pie had been decided by RBC, they had to follow past pie-cutting practice in setting the size of the slice to be given to Chann and his peers.

There was no basis, said the Court, for RBC’s plea that Chann’s bonus should be reduced simply because he was a former employee. The company could arbitrarily decide how much in total bonuses would be given to all employees, but the next step, allocating individual bonuses — even for terminated employees — had to be done fairly and reasonably.

In Chann’s case, an additional 2002 bonus of more than $60,000, plus a hefty bonus for 2003, were awarded. The judge held that RBC failed to reward Chann’s relative contribution to profitability, with the Court pinpointing his loyal and successful efforts in originating business.

RBC’s argument that bonuses were for retention purposes was flatly rejected, with the Court finding that the bonus pool was determined each fiscal year based on past investment banking group performance. Payouts varied wildly from year to year, so it could hardly be said that rewards for past success were intended to lock employees in with the company.

Bonus plans have become increasingly popular in recent years as employers strive to remain competitive and encourage employee productivity. In my view, this case highlights several important lessons for employers:

1. Define your obligations narrowly. Chann relied on RBC’s own documents and practices to convince the Court that he had been improperly denied his past bonus. Further, RBC could not produce any documents that permitted it to deny a bonus for the notice period. A different result may have prevailed with the right bonus plan or employment contract wording.

2. Discretion is rarely absolute. While retention may justify higher bonuses in some cases, employers cannot treat some plan members arbitrarily or more harshly simply because they are former employees, particularly if the plan does not say so. Dismissed employees know how plans work and are becoming increasingly vigorous in demanding reasons for being denied a payout.

3. Read your own fine print. If, as RBC had done, you commit to following past practice, the legal case is exceedingly difficult to win when companies try to change the approach.

4. Be careful about incentive schemes. Experience shows employees will often do no more and no less than exactly what the employer pays for. Chann’s damage award reflected the uncontradicted evidence that he had actually responded to RBC’s criticisms, and became a better rainmaker, so he had essentially met his end of the bargain.

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If you, or someone you care about, is dealing with employment law issues in the Toronto, Ontario Region, contact Lang Michener LLP.

This article is taken from an interview with Howard A. Levitt,Employment Lawyer at Lang Michener LLP, a Toronto, Ontario Employment Law Firm. Note that laws vary from province to province. Please consult with a lawyer in your own area to be sure of the laws and specific issues in your own jurisdiction.