Employee Terminated for Theft Still Entitled to Bonus

The Ontario Court of Appeal recently confirmed that when an employee was terminated for stealing from his employer, he was still entitled to his annual bonus because it was clearly an integral part of his contract, even if he had breached his fiduciary duty.

Facts of the case

An executive at a development firm misappropriated the employer’s labour, materials and funds to renovate his home. When the employer discovered the wrongdoing, the employer terminated the employee for cause and subsequently sued the executive for damages for conversion, breach of employment contract, unjust enrichment and breach of fiduciary duty. The employee counterclaimed in respect of his bonuses for 2007 and 2008, which the employer did not think it had to pay the employee after what happened.

The parties ultimately submitted the dispute to arbitration.

At arbitration, the employee was found to owe the company a fiduciary duty given that he was an officer of the company and one of the few trusted individuals there.

The arbitrator awarded the employer damages totalling $546,452 representing:

• $315,452 in respect of the misappropriated labour, materials and funds
• $231,000 to compensate for the delay to one of the employer’s legitimate projects occasioned by the executive’s diversion of resources and attention to his home renovations

However, the arbitrator found the executive was still entitled to his annual bonus equal to 30 percent of the employer’s profits after overhead because it made up an integral part of his employment contract from the very first day he joined the firm. Hence, the arbitrator awarded the employee $364,661.33 to satisfy his unpaid bonuses for 2007 and 2008.

The employer appealed to the Ontario Superior Court of Justice.

The appeal judge found that the arbitrator erred by failing to apply the principles that inform the remedies for breach of fiduciary duty when deciding on entitlement to bonus money. The judge found that:

…the only way to return the employer to its original position was to deprive the employee of his bonus from the date of the breach onward, on the basis that “had [the employer] been aware that [the employee] was secretly diverting the company’s assets and resources from September 3, 2007, [the employer] would most assuredly have terminated [the employee]’s employment contract as it did immediately upon discovering [the employee]’s dishonest activities.

The judge viewed the bonus as equivalent to property or a business advantage belonging to the company. Confirming the principle found in Canadian Aero Service Ltd. v. O’Malley, that “bonuses are included in the forms of compensation a wrongdoing fiduciary is not entitled to be paid during the period of their wrongdoing.”

Hence, the Superior Court of Justice reversed the arbitrator’s decision.

The employee was not satisfied and appealed to the Ontario Court of Appeal.

The Ontario Court of Appeal allowed the appeal and restored the arbitrator’s award.

The Court of Appeal concluded the remedies for breach of fiduciary duty are discretionary and guided by the goals of restitution and deterrence. An employee is not necessarily disentitled to a bonus because of wrongdoing. The determination must be fact-specific and will depend on the particular case.

The arbitrator achieved the two goals of fiduciary relief. The arbitrator required the employee to compensate the employer for the time, money, and resources he misappropriated. With the damage award, the employer was put back in the same position it would have been in but for the breach. The goal of restitution was accomplished with that award.

The arbitrator decision ensured that the employee did not benefit from what he gained from his wrongful conduct. Also, the employee lost his job. According to the Court of Appeal, this meets the goal of deterrence.

In addition, the employee’s bonus was a significant part of his overall compensation and was non-discretionary. Denying him the bonus in this scenario amounted to denying him wages owed that had been earned, to which he was entitled regardless of his honesty as an employee.

Therefore, the arbitrator carefully considered the nature of bonuses, heard all the evidence and examined the nature of fiduciaries before coming to a decision. This decision was restored.

When determining as to whether the employee has a right to the bonus upon termination, the wording of the bonus policy or bonus provision in employment contracts must be analyzed carefully.

With the collaboration of Christina Catenacci, LLB