In Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 the Supreme Court of Canada (“SCC”) weighed in on one of employment law’s most contentious issues: the legal test to determine whether terminated employees are entitled to payments under incentive plans during the reasonable notice period.
The Plaintiff, David Matthews, worked for the Defendant, Ocean Nutrition Canada Limited (“Ocean”) since 1997. In 2007, Ocean hired a new Chief Operating Office who was found to have engaged in a “campaign” to marginalize Mr. Matthews. Mr. Matthews left Ocean in 2011 for new employment. Approximately 13 months later, Ocean was sold for $540 million. The sale of the business triggered payment under Ocean’s Long Term Incentive Plan (“LTIP”) to employees who qualified under the plan. Ocean took the position that Mr. Matthews was not actively employed on that date, so he was not qualified for payment.
The trial judge found that Ocean had constructively dismissed Mr. Matthews and awarded him 15 months reasonable notice, during which the sale of the business occurred. Mr. Matthews was entitled to damages equivalent to what he would have been paid under the LTIP because 1) he would have qualified for the LTIP payment but for his constructive dismissal, and 2) the terms of the LTIP did not unambiguously limit his common law right to damages for Ocean’s failure to provide him with reasonable notice.
The Nova Scotia Court of Appeal overturned the lower court’s award, holding that the terms of the LTIP were unambiguous and that Mr. Matthews was not eligible to receive an LTIP payment once he left Ocean.
Supreme Court of Canada
The SCC restored the trial judge’s award, holding that Mr. Matthews’ damages for his constructive dismissal included the incentive payment, which in this case was $1,086,893.36. The SCC emphasized that it is an implied term of the employment contract to provide reasonable notice of termination but it is not an implied term to provide pay in lieu of such notice, which is a breach of contract entitling employees to damages.
The SCC stated that, in determining whether a terminated employee is entitled to damages for the loss of a bonus, the court must ask two questions:
- Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?
- If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
The SCC distinguished caselaw which considered if the bonus was an “integral” component of remuneration in question #1 on the basis that Mr. Matthew’s incentive payment was not discretionary. In this case, it was uncontested that but for Mr. Matthews’ dismissal, he would have received an LTIP payment.
With respect to question #2, the SCC followed the line of reasoning in Paquette v. TeraGo Networks Inc., 2016 ONCA 618 and Taggart v. Canada Life Assurance Co. (2006), 50 C.C.P.B. 163, holding that the question is “not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the [employee’s] common law rights”. The LTIP in question contained the following terms:
- ONC shall have no obligation under this Agreement to the Employee unless on the date of a Realization Event the Employee is a full-time employee of ONC. For greater certainty, this Agreement shall be of no force and effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.
- The Long Term Value Creation Bonus Plan does not have any current or future value other than on the date of a Realization Event and shall not be calculated as part of the Employee’s compensation for any purpose, including in connection with the Employee’s resignation or in any severance calculation.
The SCC stated that language requiring an employee to be working full-time or to be actively employed will not suffice to remove an employee’s common law right, nor would a clause purporting to remove an employee’s common law right to damages upon termination “with or without cause”. They also held that language which states that bonus entitlement is precluded for “severance” calculations was not sufficiently clear language on the basis that severance and damages are distinct concepts. Finally, the SCC stated that even if the clause referred to unlawful termination, it would not unambiguously remove the employee’s common law right. In doing so, the SCC reiterated the notion that the employment contract is only treated as terminated come the end of the reasonable notice period. The SCC re-stated its earlier finding from Bauer v. Bank of Montreal,  2 S.C.R. 102, that exclusion clauses “must clearly cover the exact circumstances which have arisen”. In its holding, the SCC therefore confirmed that the bar to oust common law rights in these circumstances is very high.
If an employer is looking to exclude employees’ common law rights to damages for pay in lieu of bonuses after written notice of termination is provided, we advise the following:
- Employment contracts, bonus plans and incentive plans should be reviewed to ensure they meet the high threshold required to limited employees’ common law rights,
- Offer letters, contracts and plans should all contain the same language limiting entitlement to such payments,
- Contracts and plans should be crafted to “cover the exact circumstances” which are envisioned, including language that explicitly removes the right to common law damages that may arise during the notice period
The lawyers at Heeney Vokey would be happy to assist with the above.