Supreme Court of Canada affirms bonus entitlement for terminated employees

It is not often that the Supreme Court of Canada hears employment law cases. In October of 2020, however, the Court released its decision in Matthews v. Ocean Nutrition Canada Ltd., an appeal from the Nova Scotia Court of Appeal’s decision in a constructive dismissal case. In a blow to employers, our nation’s highest court ruled that an employee is entitled to compensation under a Long Term Incentive Plan (LTIP), despite language to the contrary.

The Facts

Chemist David Matthews was the Vice-President, New and Emerging Technologies, of Ocean Nutrition Canada Ltd. As a senior executive of the company, he was enrolled in a Long Term Incentive Plan as part of his compensation package.

Under the terms of the LTIP, a payout would be provided upon the happening of a “realization event”, one of which being the acquisition of Ocean by another company. The LTIP contained provisions regarding termination of employment, including the following:

2.03 Conditions Precedent:

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 or effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.

[…]

2.05 General:

The Long Term Value Creation Bonus Plan does not have any current or future value other than on the date of the 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.

Ten years into Matthews’ tenure with Ocean, the company hired a new Chief Operating Officer. The relationship between Matthews and the new COO was strained, and led to what the employee alleged was a campaign to marginalize him within the company.

Matthews argued that changes to his employment, which included a change to his title and a reduction in his work and responsibilities, amounted to a constructive dismissal, and he resigned.

A year later, Ocean was purchased by Royal DSM N.V. Shortly thereafter, Matthews brought an action against Ocean for damages for wrongful dismissal.

The LTIP Case

Matthews sought damages for common law reasonable notice, as well as damages for loss of payout under the LTIP.

The Trial and Appeal

The trial judge found that Matthews had been constructively dismissed and awarded damages for common law reasonable notice in the amount of fifteen months. The trial judge also found that there was a common law right to damages for loss of the payout under the LTIP because, but for Matthews’ wrongful dismissal by Ocean, he would have been employed during the notice period and would have been entitled to the payout arising from Ocean’s acquisition.

Matthews was awarded damages for the loss of the payout in the amount of $1,086,893.36.

Ocean appealed the trial judge’s decision to the Nova Scotia Court of Appeal. While a majority of the court upheld the trial judge decision concluding that that Matthews had been constructively dismissed and was entitled to fifteen months’ common law reasonable notice, it disagreed with respect to the LTIP.

The appeal court held that the trial judge erred in finding that entitlement to damages for loss of payout under the LTIP was a common law right, rather than a contractual right derived from the language of the LTIP. The court pointed out that the LTIP contained clear language disentitling employees to a payout at the end of the employment relationship, and concluded that Matthews was therefore not entitled to damages for loss of payout under the LTIP.

A dissenting member of the appeal court disagreed with the majority, holding that Matthews was entitled to damages for loss of payout under the LTIP based on the implied duty of good faith and honesty in contracting.

Matthews appealed to the Supreme Court of Canada.

The Supreme Court of Canada decision

Writing for a unanimous court, Justice Kasirer found that the majority of the Nova Scotia Court of Appeal erred in not awarding Matthews the amount of the LTIP as part of his common law damages for breach of the implied term of the employment contract to provide reasonable notice. Justice Kasirer specifically found that the majority incorrectly focused on whether terms of the LTIP were “plain and unambiguous” instead of asking what damages were owed to Matthews as a result of Ocean’s failure to provide him reasonable notice. Justice Kasirer explained that the issue was not whether Matthews was entitled to the LTIP itself, but rather what damages he was entitled to and whether he was entitled to compensation for bonuses he would have earned had Ocean not breached the employment contract.

Justice Kasirer confirmed the test discussed by the Ontario Court of Appeal in Paquette v. TeraGo Networks Inc. As you might recall, Paquette confirmed that in order to determine the appropriate damages for breach of the implied terms to provide reasonable notice, the court must ask:

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 remove or limit that common law right?

In applying the first step of the test, Justice Kasirer rejected Oceans’ argument that the bonus must form an integral part of the employee’s compensation in order to be entitled to its benefit. But for Matthew’s dismissal without reasonable notice, he would have been entitled to the LTIP payout, as the “realization event” would have occurred during that period.

Turning to the second step of the test, Justice Kasirer found that neither clause 2.03 nor clause 2.05 was enough to unambiguously remove or limit Matthew’s common law right.

While he noted Ocean’s poor treatment of Matthews, Justice Kasirer did not consider the duty of good faith discussed by the dissenting judge in the decision below. He did, however, suggest that “a duty of good faith will one day bind the employer based on a mutual obligation of loyalty in a non-fiduciary sense during the life of the employment contract, owed reciprocally by both the employer and employee”.

The Takeaway

With this decision, the Supreme Court of Canada affirmed the approach Ontario courts have taken in interpreting bonus entitlements during notice periods: an employment contract must clearly and unambiguously remove an employee’s common law right to a bonus or other incentive payment during any common law reasonable notice period.

Employers should carefully review the language of their employment contracts and incentive plans with a view to this decision. Although the Court declined to offer guidance on the duty of good faith, employers should be mindful of those duties throughout the employment relationship, as the Court has signaled that this duty might play a significant role in the future.

Minken Employment Lawyers is your source for expert advice and advocacy on today’s employment law issues. If you have any questions on compensation and bonus entitlements, please contact us or call us at 905-477-7011. Sign up for our newsletter to receive up-to-date Employment Law information, including new legislation and Court decisions impacting your workplace.

Please note that this article is for informational purposes only and does not constitute legal advice.