October 27, 2020
The Supreme Court of Canada recently ruled on a case which may have implications for bonus or incentive agreements you have with employees.
The Court’s unanimous decision in the case of Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, reinstated damages in the amount of $1.1 million to an employee who had alleged constructive dismissal against his employer.
In addition to clarifying the law relating to damages for wrongful dismissal, it also provides guidance with respect to employee entitlement to incentive payments during the period of notice at common law.
Additionally, the Court commented generally, but without ruling, on aspects of the case that are related to an employer’s broader duty of good faith. The comments make it clear that employers should be careful to conduct themselves with good faith throughout the entirety of the employment relationship.
You may wish to review any contracts and incentive plans with your employees to ensure that the limiting language is consistent with the Court’s decision in this case.
Please contact me for assistance or with any questions you may have regarding the ruling.
Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26
David Matthews had been employed by Ocean Nutrition Canada Ltd. (“Ocean” or “Company”) since 1997 and resigned in 2011, a period of 15 years. At the time of his resignation Matthews was the Vice-President, New and Emerging Technologies.
Matthews alleged constructive dismissal and he claimed damages for reasonable notice. Various levels of the courts agreed that he had in fact been constructively dismissed. Notice was set at 15 months.
Approximately 13 months after Mr. Matthews’ departure, the Company was sold for $540 million. The sale of the Company constituted a “Realization Event” for the purposes of a Long Term Incentive Plan (“LTIP”) for certain employees of the Company and payouts were made to employees who were eligible under the LTIP.
Matthews claimed that he had been deprived of a right under the LTIP, which provided that there would be a payment to him of $1 million on a sale of the business.
The Company took the position that because he was not ‘actively employed’ at the time of the sale he did not satisfy the terms of the LTIP and was not entitled to receive a payment.
The Supreme Court found that had Matthews been given working notice of his termination during the reasonable notice period, he would have been entitled to the LTIP.
Mr. Matthews’ application also alleged that the constructive dismissal was carried out in bad faith and in breach of the Company’s duty of good faith.
On the issue of good faith, the Court made it clear that the contractual breach of duty of good faith is separate and distinct from the failure to provide reasonable notice.
Background
Mr. Matthews was a long term employee of Ocean, working with the Company in a number of management positions from 1997 to 2011. As part of Ocean’s senior management team, Mr. Matthews participated in Ocean’s LTIP. Under the terms of the LTIP, eligible employees were entitled to receive a payout upon the occurrence of a Realization Event, which included a sale of the Company.
Approximately ten (10) years into Mr. Matthews’ employment with Ocean, Ocean hired a new Chief Operating Officer. Shortly thereafter, the COO changed Mr. Matthews’ title and limited his responsibilities. While this and other actions created tensions, Mr. Matthews stayed in order to collect on his LTIP as he anticipated the Company would soon be sold. He eventually resigned from his position with the Company in June 2011 and commenced employment with a new employer.
Thirteen (13) months following Mr. Matthews’ resignation, and within the 15 months’ reasonable notice period established at trial by the court, Ocean was sold. The sale constituted a Realization Event and resulted in a payout to employees who were eligible under the LTIP. Ocean took the position that Mr. Matthews was not entitled to payment under the LTIP because he was no longer actively employed by Ocean.
Mr. Matthews commenced an action against Ocean alleging that he had been constructively dismissed, citing the limiting of his responsibilities, changing of his title and the COO being dishonest with him about his status with Ocean as a “campaign to marginalize” Mr. Matthews.
He sought reasonable notice damages, as well as payment under the LTIP. He also alleged that the constructive dismissal was carried out in a way that breached Ocean’s duty of good faith.
Trial
In taking the position that that Mr. Matthews did not qualify for payment under the LTIP because he was not actively employed by Ocean at the time of the Realization Event, Ocean relied on the following limiting provisions of the LTIP:
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.
The trial judge found that Mr. Matthews had been constructively dismissed and was entitled to 15 months’ pay in lieu of reasonable notice. The judge also found that Mr. Matthews was entitled to damages in the amount of $1.1 million on account of payment under the LTIP..
Nova Scotia Court of Appeal
Ocean appealed the decision to the Nova Scotia Court of Appeal, which upheld the finding that Mr. Matthews had been constructively dismissed, but overturned the decision relating to the LTIP payment on the basis that the LTIP was sufficiently clear to eliminate any right to a payout after employment had ended.
Mr. Matthews appealed the decision to the Supreme Court of Canada.
Supreme Court of Canada
In a unanimous decision, the Supreme Court of Canada allowed the appeal, set aside the Court of Appeal’s decision, and restored the trial judgment and damage award to Mr. Matthews. In making the decision, the Court clarified the law relating to damages for wrongfully terminated employees.
The Court confirmed that it is an implied duty of every employment agreement that an employee is entitled to reasonable notice upon termination. If an employee is terminated without appropriate reasonable notice, then the employee is entitled to damages for breach of this implied term, and those damages will include all of the salary including bonuses that an employee would have earned had the employee continued to work through the reasonable notice period.
When determining whether the damages for breach of this implied term includes bonus payments or other benefits, the Court stated that two questions must be asked:
- Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period; and
- If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
With respect to the first question, the Court found that had Mr. Matthews worked through the reasonable notice period, he would have been employed when the Realization Event occurred and would have been entitled to the LTIP payment.
With respect to the second question, the Court examined the limiting provisions of the LTIP and found that the provisions did not “clearly and unambiguously” limit Mr. Matthews’ common law right. In particular, the Court found that:
- Language requiring an employee to be “full-time” or “active” will not suffice to remove an employee’s right to common law damages because if an employee had been provided with reasonable notice, they would be “full-time” or actively employed” throughout the reasonable notice period; and
- Language that purports to remove an employee’s common law right to damages upon termination “with or without cause” will not suffice to remove an employee’s right to common law damages when an employee has been terminated without notice, because a termination without reasonable notice does not equate to a “without cause” termination. A termination without reasonable notice is instead an “unlawful” termination and such an event was not provided for in the limiting provisions.
The Court went on to say that even if the clause had referred to an “unlawful termination”, this would not still not suffice to unambiguously alter the employee’s common law entitlement.
Good Faith
On the issue of good faith, the Court made it clear that the contractual breach of duty of good faith is separate and distinct from the failure to provide reasonable notice.
While the Court commented generally on a duty of good faith, the Court declined to rule on whether a broader duty of good faith exists during the life of the employment contract, stating only that “one day (a duty of good faith) may bind the employer based on mutual obligation of loyalty in a non-fiduciary sense during the life of the employment agreement”.