A recent decision by the Supreme Court of Canada (the “Court”) has clarified the law regarding an employee’s entitlement to incentives, bonuses, and other benefits during the reasonable notice period. In Matthews v Ocean Nutrition Canada Ltd, 2020 SCC 26, the Court unanimously held that an employee who was constructively dismissed was entitled to an incentive payment of over one million dollars upon the sale of his former employer’s business, which occurred during the employee’s notice period. In doing so, the Court affirmed the approach taken by Ontario courts regarding entitlements to incentives and bonuses during notice periods.
While the Court has therefore not created new law in Ontario, it has set a high bar across the country regarding what contractual language would be sufficiently clear and unambiguous to limit or remove employee entitlements to incentive compensation during the common law notice period. This will likely create additional confusion (and inspire future litigation) regarding what language employers could use to meet such a bar, until a clause is upheld.
The plaintiff, David Matthews, was an experienced chemist who began working for Ocean Nutrition Canada Limited and its predecessor companies in 1997. As a senior executive, Mr. Matthews was part of the company’s long term incentive plan (“LTIP” or the “Plan”), a program designed to award and retain certain executive employees. Participating employees would be entitled to a payout in the event that the company is sold. Given the Plan’s retention goal, the size of payouts generally scaled with an employee’s years of service. Mr. Matthews was the longest serving employee under the Plan.
The terms of the LTIP were set out in a separate contract. The contract set out conditions for payouts, many of which related to continued employment. First, the Plan contained a clause stating that it would be “of no force of effect” if an employee ceased to be employed, regardless of whether he resigned or was dismissed, “with or without cause”. In other words, if Mr. Matthews was not a full-time employee at the time of Ocean Nutrition’s sale, he would be disentitled from a payout. Another clause provided that the Plan would not be calculated as part of an employee’s compensation “for any purpose, including in connection with the employee’s resignation or in any severance calculations”.
In 2007, Ocean Nutrition hired a new Chief Operating Officer, and friction quickly developed between him and Mr. Matthews. The trial judge found that the COO made persistent efforts to marginalize Mr. Matthews and diminish his role within the company, including by progressively removing his responsibilities and refusing to consult with him. Consequently, Mr. Matthews resigned from Ocean Nutrition in June 2011.
Thirteen months later, in July 2012, Ocean Nutrition was sold. Under the LTIP, Mr. Matthews would have received a payout of approximately $1.1 million had he been employed with the company at the time of sale.
Mr. Matthews sued his former employer for constructive dismissal, claiming damages for Ocean Nutrition’s failure to provide reasonable notice and the losses that arose as a result, including the loss of his entitlements under the LTIP. Mr. Matthews further alleged that his dismissal had been carried out in bad faith and constituted a breach of Ocean Nutrition’s common law duty of good faith.
At the Supreme Court of Nova Scotia, the trial judge found in favour of Mr. Matthews, holding that he had been constructively dismissed and was entitled to 15 months of notice. Because the sale of Ocean Nutrition took place during the notice period, the trial judge found that Mr. Matthews was entitled to his entitlements under the LTIP, despite the fact that he was not employed with the company at the time of the sale.
The majority of the Nova Scotia Court of Appeal allowed the employer’s appeal in part, finding that while Mr. Matthews had indeed been constructively dismissed, he was not entitled to a payout under the LTIP. The Court of Appeal held that the contractual language of the LTIP plainly and unambiguously disentitled Mr. Matthews from such a payout.
Mr. Matthews appealed to the Supreme Court of Canada.
Supreme Court of Canada Decision
Entitlement to the LTIP
The Court overturned the decision of the Nova Scotia Court of Appeal. In restoring the decision of the trial judge, the Court applied Ontario case law, particularly Paquette v TeraGo Networks Inc, 2016 ONCA 618 [Paquette]—a decision which we wrote about in detail here.
The Court affirmed the following two-step test, first set out in Paquette, for determining whether an employee’s bonus payments should be included as part of their damages for wrongful dismissal:
- Would the employee have been entitled to the bonus as part of their compensation during the reasonable notice period had they continued to be employed?
- If so, do the terms of the employment contract or bonus plan unambiguously remove or limit the employee’s common law entitlement to the bonus?
The Court, answering the first question, held that Mr. Matthews would have been entitled to receive a payout under the LTIP but for his constructive dismissal. It was uncontested that the sale of Ocean Nutrition occurred during Mr. Matthews’s reasonable notice period. Had Mr. Matthews been given proper notice, he would have been given an opportunity to work until the end of the notice period, remained employed throughout, and retained eligibility to claim his entitlement under the LTIP.
With respect to the second branch of the test, the Court held that the terms of the LTIP failed to “unambiguously limit or remove” Mr. Matthews’s common law right to receive the bonus as part of damages awarded for wrongful dismissal. The Court came to this conclusion based on the following findings:
- The term that required Mr. Matthews to remain in “active” or “full-time” employment did not suffice to disentitle him because, as noted above, he would have been considered employed had he been given proper notice.
- Language that attempts to exclude or limit an employee’s right to compensation will be narrowly construed and “must clearly cover the exact circumstances which have arisen”. Mr. Matthews was “unlawfully terminated”, a circumstance not covered by the language in the Plan. Further, the Court went on to state that, in this case, even if the clause had expressly referred to an unlawful termination, such a clause would still have failed to unambiguously remove Mr. Matthews’s entitlement because, for the purpose of calculating wrongful dismissal damages, an employment agreement will not be treated as “terminated” until the end of the notice period.
- The term which purported to remove entitlement to the LTIP from Mr. Matthews’s severance calculations was insufficient to do so because “severance” and “damages” are distinct legal concepts. While severance pay’s purpose is to “compensate long-serving employees for their years of service and […] for the special losses they suffer when the employment terminates”, the primary purpose of reasonable notice, or damages in lieu thereof, is to “protect employees by providing them an opportunity to seek alternative employment”.
When considering the second branch of the test, the Court also suggested that in certain cases, it may be appropriate to examine whether the clauses that purport to limit employee entitlements were adequately brought to the employee’s attention, and whether such clauses are compatible with minimum employment standards. However, the Court noted that such issues did not arise in this case.
As a result, the Court found that Mr. Matthews was entitled to compensation for loss of the payout he would have received under the LTIP had he worked until the end of the reasonable notice period.
Duty of Good Faith
The Court declined to make a firm ruling regarding the common law duty of good faith and Mr. Matthews’s allegations of bad faith on the part of Ocean Nutrition. However, the Court confirmed the existing principle that a contractual breach of good faith rests on a “wholly distinct” basis from that relating to failure to provide reasonable notice, so a breach of the duty of good faith would not result in the reasonable notice period being “bumped up”. For a further analysis of the duty of good faith, stay tuned for next week’s blog post.
Takeaways for Employers
The Court’s decision in this case highlights how narrowly courts will scrutinize language in employment agreements and incentive plans attempting to limit or remove an employee’s common law rights. The Court has made clear that for an exclusionary clause to be effective, it must be “absolutely clear and unambiguous”. Accordingly, employers that wish to remove entitlement to incentive compensation or other benefits during the reasonable notice period should ensure that the language employed clearly and unambiguously removes the employee’s common law rights to recover them as part of wrongful dismissal damages. Plain language that simply states the employee will lose the entitlement to incentive compensation upon termination, or when the employee is no longer “actively employed”, will very likely be insufficient to remove the entitlement.
Employers would be well advised to seek legal advice and carefully review their employment and incentive agreements, given the very high standard that the Court set in this decision and the current lack of clarity regarding what language might be sufficient to meet it. Employers should additionally seek advice regarding the rollout of such agreements, particularly with regard to drawing employees’ attention to any exclusionary clauses.
This blog is provided as an information service and summary of workplace legal issues.
This information is not intended as legal advice.