Tuesday, January 20, 2015

Contractual Interpretation: Bonus Formulas

There's an interesting new decision, Hillman v. Bedford Consulting Group Inc., dealing with an argument over an employee's bonus eligibility.

Mr. Hillman worked as an executive search consultant, and was hired in 2009 by Bedford as a senior level recruiter.  In 2012, his compensation structure was changed, to a commission structure, plus a bonus contingent on achieving certain thresholds.  Exactly what those thresholds entailed, and whether or not they were reached in 2013, was the central issue in the litigation.

Basically, if Hillman billed and collected a million dollars or more, then he was entitled to a bonus of 3% of his billings.  However, the employer argued that there was another condition - that he also needed to collect a minimum of 5% in 'admin fees' over and above the placement fees.

And there was a basis for it in the contract language, too, with language fairly clearly stating that the admin fees were a precondition for the bonus.  However, one of the paragraphs in the contract added some uncertainty:
A Partner must achieve a minimum of 5% admin fees. *We still need to discuss if the bonus is affected for underachieving on this minimum threshold.
That's a problem.  It very much suggests that underperforming the admin fee target isn't meant to disentitle the employee to his bonus (or, at least, not completely), but might be the subject of a subsequent agreement.  Justice Stinson applied the doctrine of contra proferentum, interpreting the resulting ambiguity against the party who drafted the contract - i.e. the employer.

Yet another reason why having a lawyer review your contracts is important.

Equitable Setoff

Perhaps the most interesting element of this case was the treatment of the employer's claim for equitable setoff.

When the employee resigned, he started his own competing business, and before departing he advised a client of his plans.  That client subsequently ended its relationship with the employer, and moved over to Mr. Hillman.  Accordingly, the employer made a counterclaim for the lost revenues - $43,200, on its calculation, and relied on the doctrine of equitable setoff.

This is important, because the decision itself is in the context of a motion for summary judgment by the plaintiff:  The plaintiff is seeking judgment on his claim, while the employer is not seeking judgment on its counterclaim, but is nonetheless claiming an entitlement to apply the amount of the counterclaim against any judgment the plaintiff may obtain.

After the employee left, the employer withheld a large sum in commissions owing - over $129,000 in undisputed commissions, according to the decision.  After litigation was commenced, the employer paid the commissions owing (not including the bonus), less $43,200.

Justice Stinson wasn't convinced that this scenario was appropriate for equitable setoff - in essence, that wages owing are appropriately connected to damages for alleged misappropriation of an opportunity.  However, it appears that his decision to deny the claim for equitable setoff arises more from his distaste for the way that the employer conducted itself:
Initially, the defendant refused to acknowledge or pay the undisputed amounts owed to the plaintiff, with the result that the plaintiff had to commence litigation. The defendant then forced the plaintiff to go to the further trouble and expense of bringing a motion for summary judgment. Only then, faced with the prospect that it had no real defence to the majority of the claim, did the defendant finally pay the undisputed amounts. In my view, such conduct should be discouraged and fully justifies the refusal of the discretionary remedy of equitable set-off. This situation would appear to fall squarely within the examples given by Palmer, above, in which equitable relief may properly be refused where funds have been wrongfully retained or not dispersed as agreed.
Therefore, the plaintiff essentially has a judgment for the full amount of his claim, and can enforce that claim, even though the employer may maintain an action against him seeking payment of $43,200.

What Should the Employer Have Done Differently?

At a glance, the equitable setoff decision reads a little oddly:  The employer felt it was entitled to claim against the employee, and unilaterally withheld money from the employee to offset the claim, and that was wrong, so we're not going to let the employer continue to withhold that money.  If there were a legitimate claim to equitable set-off in the first place, then surely the employer is entitled to withhold the amount of that claim in the first place.

But it seems that the judge is more concerned about the unjustified amount withheld.  Had the employer simply withheld the $43,200, then it is likely that the judge would have regarded the employer's conduct as more reasonable.

That being said, I suspect that Justice Stinson was also right that this wouldn't be an appropriate case for equitable set-off anyways - and indeed that application of the doctrine is precluded by statute.  The unpaid commissions are likely 'wages' within the meaning of the Employment Standards Act, and there are very limited scenarios in which employers can withhold amounts from wages.  The "pay the wages, and then pursue your own remedies separately" approach is very often the legally mandatory approach for employers who feel they are owed money by departing employees.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.

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