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Bonus payment makes bank executive's constructive dismissal award the largest ever

In what may well be the largest constructive dismissal award ever made in Canada, a former senior vice-president of the Toronto-Dominion Bank has won $1.7 million in damages from the employer, after mitigation. The recent decision in Schumacher v. Toronto-Dominion Bank (May 15, 1997) is noteworthy both for the way the court applied the law of constructive dismissal to a senior executive and for the treatment of his bonus entitlement, which comprised the lion's share of the damages.

The plaintiff, John Schumacher, had joined the TD Bank in 1984. In ten years, he rose through the ranks to become Senior Vice-President, Treasury Trading and Risk Management, the top trading position in the bank. By 1994, his $1.4 million bonus, added to a base salary of $200,000, made him one of the bank's top five earners.

In 1993 and 1994, Schumacher spearheaded a reorganization of the Treasury Group to make the Group's services more accessible to clients. The reorganization, called the "Navigator Project", left Schumacher in charge of all trading in five areas: derivatives, fixed income, money market, funding and foreign exchange. Following implementation of these changes, Schumacher received his best performance evaluation ever, in which it was noted that under his direction, "trading results for the first 7 months of 1994 reached record levels."

Despite what appeared to be a banner year for Schumacher, trouble was brewing. Senior executives at the bank, anxious to build up its fixed income and money market securities business, hired another executive with experience in these areas. Schumacher was kept in the dark until he learned of the hiring from his staff. He contacted his superiors, who confirmed that the new employee would be taking over fixed income and money market trading. He was told that his job title and base salary would be unchanged and that his opportunities for bonuses would not be adversely affected, because the areas left to him amounted to 90 per cent of the Treasury Group's 1994 revenues.

After a series of discussions between the parties, the bank sent Schumacher a letter reiterating its position that he had suffered no adverse impact as a result of the changes, and requesting that he report for work the next day. When Schumacher failed to appear, the bank indicated that it considered he had resigned his position. Schumacher sued, claiming he had been constructively dismissed.

CONSTRUCTIVE DISMISSAL, NOT REALIGNMENT

In ruling in Schumacher's favour, the court noted that the bank had removed two of his key responsibilities and that one of these, fixed income, had the greatest potential for growth. The Navigator Project was to be dismantled to facilitate a reorganization planned by the new executive. As well, testimony from colleagues indicated that they perceived the change in Schumacher's position as a demotion.

The court rejected the bank's claim that it had the discretion to realign employee responsibilities in order to maximize profit. In Schumacher's case, the court stated, the bank had established a pattern of negotiating these realignments with him. There was, the court ruled, an implied term in the employment contract that Schumacher would be consulted before major changes were made to his duties and responsibilities. The fact that the given reason for not consulting him was the bank's fear it would lose both Schumacher and the new executive could not be used as a justification for breaching the implied obligation to consult Schumacher.

BONUS MUST BE PAID

After awarding Schumacher 13 months' notice, the court considered whether he was entitled to receive his bonus for the notice period. The employer argued he was not, noting that under the terms of the Performance Compensation Plan (PCP) under which bonuses were paid, "recipients must be actively employed by the Bank at the time the award is paid to be eligible for payment". The court held, however, that the wording of the PCP did not decide the issue:

The court repeated this reasoning with respect to Schumacher's entitlement under the bank's Long Term Incentive Phantom Stock Plans.

In Our View

This decision appears to indicate that an employer will not be able to rely on the wording of a bonus compensation plan to avoid having the bonus included in a terminated employee's notice. It also shows that, where an employer has established a pattern of negotiating changes in terms and conditions of employment with an employee, departing from that pattern in cases of substantial reorganizations may expose it to a claim of constructive dismissal.

The TD Bank is appealing this decision. (For more recent developments, see "Ontario Court of Appeal upholds record constructive dismissal award" on our Publications page; for a similar case, see "Court of Appeal says employee who refused transfer was constructively dismissed" on our Publications page.)

For more information on this subject, please contact Steven Williams at (613) 563-7660, Extension 242.