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SCC Finds Employee Entitled to Damages for Bonus Triggered During Notice Period

SCC Finds Employee Entitled to Damages for Bonus Triggered During Notice Period
October 14, 2020

On October 9, 2020, the Supreme Court of Canada (SCC) released its decision in Matthews v. Ocean Nutrition Canada Ltd., in which it awarded damages in respect of a bonus payment which would have been earned had an employee worked to the end of his common law reasonable notice period.

BACKGROUND 

Mr. Matthews was employed by Ocean Nutrition Canada Ltd. (Ocean Nutrition) from January 1997, until his resignation in June 2011. At the time of his resignation, Mr. Matthews held the role of Vice President, New and Emerging Technologies and reported directly to the Chief Operating Officer (COO) of Ocean Nutrition. Mr. Matthews participated in Ocean Nutrition’s long-term incentive plan (LTIP), which provided for cash payments to participants based on the value of Ocean Nutrition in the event of a “Realization Event,” defined under the LTIP as a sale or public offering of Ocean Nutrition.

Ocean Nutrition hired a new COO in 2007 who, the trial judge found, began a “campaign” to marginalize Mr. Matthews within Ocean Nutrition. Nevertheless, Mr. Matthews remained with Ocean Nutrition in large part due to his belief that Ocean Nutrition would soon be sold, thereby triggering a bonus payment under the LTIP.

Eventually, however, Mr. Matthews accepted a position with a new employer and resigned. Ocean Nutrition was sold approximately 13 months following Mr. Matthews’ resignation, which constituted a Realization Event and triggered bonus payments to qualifying LTIP participants. Ocean Nutrition took the position that, under the terms of the LTIP, Mr. Matthews did not qualify for a payment. The relevant LTIP provisions were as follows:

2.03 CONDITIONS PRECEDENT:

[Ocean Nutrition] 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 [Ocean Nutrition]. For greater certainty, this Agreement shall be of no force and effect if the employee ceases to be an employee of [Ocean Nutrition], regardless of whether the Employee resigns or is terminated, with or without cause.

2.05 GENERAL:

The [LTIP] 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 Nova Scotia Supreme Court (NSSC) found that Mr. Matthews had been constructively dismissed and awarded him a 15-month notice period. In respect of the LTIP, the NSSC held that an award under the LTIP would have crystallized had Mr. Matthews remained employed throughout the notice period, and therefore he was entitled to his LTIP payment.

Ocean Nutrition appealed the decision to the Nova Scotia Court of Appeal (NSCA). The NSCA upheld the constructive dismissal finding and the 15-month notice period; however, it disagreed with the NSSC’s findings with respect to the LTIP. The NSCA held that the language of the LTIP was “plain and unambiguous” in precluding payment to employees who had resigned prior to a Realization Event.

SUPREME COURT DECISION

On appeal to the SCC, the only disagreement between the parties was whether Mr. Matthews was entitled to damages in respect of the lost LTIP payment.

The SCC clarified that the issue was not whether Mr. Matthews was entitled to the LTIP payment per se, but rather whether he was entitled to damages to compensate him for bonuses he would have earned but for Ocean Nutrition’s failure to provide reasonable notice. As articulated by the SCC, “[t]he purpose of damages in lieu of reasonable notice is to put the employee in the position they would have been in had they continued to work through to the end of the notice period.”

In analyzing the issue, the SCC endorsed the approach taken by the Ontario Court of Appeal in Paquette v. TeraGo Networks Inc., 2016 ONCA 618. The SCC stated:

Courts should accordingly ask two questions when determining whether the appropriate quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and certain other benefits. 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?

Applying the above to the case at bar, the SCC answered the first question in the affirmative: since the Realization Event was triggered within the 15-month reasonable notice period, Mr. Matthews would have been entitled to the bonus had he worked to the end of the notice period.

As for the second question, the SCC concluded that clause 2.03 failed to unambiguously limit or remove Mr. Matthew’s common law right to damages:

[T]he provisions of the agreement must be absolutely clear and unambiguous. So, language requiring an employee to be ‘full-time’ or ‘active”, such as clause 2.03, will not suffice to remove an employee’s common law right to damages. After all, had Mr. Matthews been given proper notice, he would have been ‘full-time’ or ‘actively employed’ throughout the reasonable notice period...

Similarly, where a clause purports to remove an employee’s common law right to damages upon termination ‘with or without cause’, such as clause 2.03, this language will not suffice. Here, Mr. Matthews suffered an unlawful termination since he was constructively dismissed without notice . . . exclusion clauses ‘must clearly cover the exact circumstances which have arisen’. So, in Mr. Matthews’ case, the trial judge properly recognized that ‘[t]ermination without cause does not imply termination without notice’ . . . Yet, it bears repeating that, for the purpose of calculating wrongful dismissal damages, the employment contract is not treated as ‘terminated’ until after the reasonable notice period expires. So, even if the clause had expressly referred to an unlawful termination, in my view, this too would not unambiguously alter the employee’s common law entitlement.

The SCC went on to conclude that clause 2.05 had no effect on limiting or removing Mr. Matthew’s common law right to damages, since “severance and damages are distinct legal concepts,” and therefore the clause’s reference to severance does not limit Mr. Matthew’s ability to claim damages in respect of his wrongful dismissal. The SCC went on to say that the inclusion in the clause of the language stating that the LTIP “does not have any current or future value other than on the date of a Realization Event” only supported the conclusion that, had Mr. Matthews been given proper notice of termination, “he would have remained a full-time employee on the date of the Realization Event, and thus would have received an LTIP payment. His damages reflect that lost opportunity.”

The SCC allowed the appeal, set aside the judgment of the NSCA and restored the judgment of the NSSC, thereby awarding Mr. Matthews damages in respect of his lost LTIP payment.

KEY EMPLOYER TAKEAWAYS

Employers must continue to regularly review their plans and employment agreements. The Matthews decision clarifies that clauses which attempt to limit liability in respect of lost short and long-term incentives that would have otherwise been awarded during an employee’s reasonable notice period must be drafted clearly and unambiguously to remove an employee’s right to common law damages. Language requiring an employee, for example, to be “actively” employed or employed “full-time” to be eligible for payment will not suffice.

For further information or any questions regarding how this amendment may impact your business, please contact:

Jordan Schubert         416-863-2496
Andrea York                416-863-5263

or any other member of our Employment & Labour and Pensions, Benefits & Executive Compensation groups.