Exec caught stealing company resources still entitled to bonuses

Employer can’t withhold regular bonuses that were part of executive’s pay, despite misconduct: Court

An Ontario company who fired an executive for stealing labour and materials for his personal use had just cause for dismissal but must pay him the bonuses he earned at the same time as his misconduct, the Ontario Court of Appeal has ruled.

Leonard Rossetto was an executive with Mady Development Corp. in Toronto. In the fall of 2007, Rossetto was renovating his house and used company funds to pay for it. He also diverted Mady labour and used Mady materials in the renovations. It took a year for Mady to discover what Rossetto did, but when it did, it terminated his employment for cause on Dec. 12, 2008.

Mady followed up Rossetto’s termination by suing him for breach of employment contract, unjust enrichment and breach of fiduciary duty. Rossetto filed a countersuit demanding the payment of bonuses he was owed for 2007 and 2008. Under his employment contract, he was entitled to an annual bonus equal to 30 per cent of Mady’s profits after overhead.

Dishonest conduct cost company more than $500,000

An arbitrator estimated Mady’s losses from misappropriated labour, materials and funds to be $315,452 and another $231,000 for the delay of one of Mady’s contracts caused by that misappropriation and ordered Rossetto to pay damages reflecting those totals. The arbitrator also found that Rossetto was part of a small group of executives for Mady and was trusted to help run the company effectively. His profit-based bonus was a result of how much the company relied on him to ensure things went well, a “true partnership” between Rossetto and Mady. However, the bonus was part of his payment for performing his duties and an employee was entitled to being paid for work done, regardless of whether the employee was dishonest or not, said the arbitrator. Mady was ordered to pay Rossetto $364,661.33 for his bonuses.

Mady appealed the decision, and the Ontario Superior Court of Justice found that because Rossetto was a fiduciary employee, he was not entitled to bonuses earning while he was breaching his fiduciary duty. The court noted it sought to return the wronged party — Mady — to the position it was in before Rossetto breached his duty by secretly diverting company resources and money. The court also found if Mady had known about Rossetto’s misconduct when it happened, it would have terminated his employment at the time, at which point he wouldn’t have been earning his bonuses.

“Bonuses are included in the forms of compensation a wrongdoing fiduciary is not entitled to be paid during the period of their wrongdoing,” said the court.

Rossetto took the case to the Ontario Court of Appeal, seeking to reinstate his bonuses.

Bonuses part of exec’s regular pay: Court of Appeal

The court of appeal noted that damages for breach of fiduciary duty are designed to serve the purposes of restitution — to repair the damage to the injured party — and deterrence — to prevent the offender from benefitting from the breach. The extent that these are addressed can vary and depend on the particular case, said the appeal court.

The court of appeal found the lower court failed to properly take into account the fact that Mady had been awarded more than $500,000 to make up for the losses it suffered from Mady’s conduct. That award already took care of restoring Mady to where it was before Rossetto’s breach, said the appeal court. The court also found the size of the arbitrator’s award was substantial enough to also serve the purpose of deterrence.

The appeal court found the lower court erred in finding the bonuses were equivalent to company property. It referred to a common principle that employers can’t withhold wages for past performance, even where there is misconduct and breach of fiduciary duty, because the employer has already received “the fruit of the employee’s efforts.” In addition, the bonus was a fixed and integral part of Rossetto’s compensation, rather than a variable, discretionary bonus, said the appeal court.

The appeal court agreed with the arbitrator’s decision that Rossetto was entitled to the bonuses and reinstated the arbitrator’s decision. Rossetto was required to pay Mady $546,452 to cover the cost of hi diversion of Mady’s resources, while Mady was ordered to pay Rossetto $364,661.33 for his unpaid bonuses, plus the costs of his appeal.

For more information see:

•Mady Development Corp. v. Rossetto, 2012 ONCA 31 (Ont. C.A.).

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