Right to Bonus Payments After Dismissal: A Major Shift in Favour of Employees

The Supreme Court of Canada recently released a key decision (Matthews v Ocean Nutrition Canada Ltd) on an employee’s entitlement to payment under an incentive plan, where the employee has been wrongfully dismissed.

This decision moves the law in favour of employees and makes it more difficult for employers to limit their employees’ entitlement to payments and bonuses in the event of dismissal. The Court has made it clear that to limit this entitlement, the limiting language in the employment contract must be extremely precise and unambiguous.

Background

David Matthews was an experienced chemist who worked in senior management at Ocean Nutrition, a Nova Scotia-based company. Ocean hired a new Chief Operating Officer who, for reasons unknown, took steps to push Matthews out of the company. This included limiting Matthews’ responsibilities, lying to and about him, making decisions behind his back, and ignoring requests to speak with him about his role in the company.

Though Matthews did his best to stay with Ocean, he eventually ended up taking a position with a new employer due to these conditions. The trial court determined that this was a constructive dismissal – Ocean had engaged in a course of conduct that breached the employment contract and made continued employment intolerable. Matthews was therefore entitled to payment in lieu of a reasonable notice period of 15 months.

Issues

The key issue was whether Matthews was entitled to payment under the company’s Long Term Incentive Plan (LTIP). The LTIP provided certain senior employees with a significant payout upon the occurrence of a “Realization Event,” including the sale of the company. The company was sold 13 months after Matthews’ departure (within his 15-month reasonable notice period), triggering a payout under the LTIP.

However, there was language in the contract stating that the LTIP did not apply:

• “unless on the date of a Realization Event the Employee is a full-time employee of [Ocean]”;

• “if the employee ceases to be an employee of [Ocean], regardless of whether the Employee resigns or is terminated, with or without cause”.

The contract further stated that the LTIP would 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.”

Because Matthews was not employed by Ocean when the Realization Event occurred (notwithstanding that this was the result of wrongful dismissal), Ocean argued that he was not entitled to have the LTIP payout included in his wrongful dismissal damages.

The trial court held that Matthews was entitled to have the LTIP payout included in his damages in lieu of reasonable notice. The Nova Scotia Court of Appeal held that this was an error: the terms of the LTIP were “plain and unambiguous” that entitlement to LTIP payment ceased the moment Matthews left the company.

Supreme Court of Canada’s Decision

The Supreme Court reversed the Court of Appeal’s decision and ruled that Matthews was entitled to damages in lieu of payment under the LTIP, despite not being employed by Ocean at the time the Realization Event occurred.

The SCC noted that the Court of Appeal focused on the wrong point when interpreting the wording of the contract.

The issue was not whether Matthews was entitled to payment under the LTIP in itself, but rather, what damages he was entitled to, and whether he was entitled under the common law of wrongful dismissal to compensation for bonuses he would have earned if Ocean had not breached the employment contract.

The SCC confirmed that courts should apply the following test in wrongful dismissal cases. When considering whether a wrongfully dismissed employee is entitled to benefits that they would have otherwise received, courts must ask two questions:

1. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?
2. If so, do the terms of the employment contract or bonus plan unambiguously take away or limit this common law right?

In Matthews’ case, the answer to Question #1 was clearly “yes,” because the Realization Event occurred within that period. More interestingly, the Court found that the answer to Question #2 was “no.”

To successfully remove an employee’s common law right to damages in lieu of compensation during the reasonable notice period, the provisions of the employment contract must be absolutely clear and unambiguous in removing this common law right. (This is especially true when the employer drafts the contract and the employee cannot realistically negotiate its terms.)

Contractual language requiring the employee to be “full time” or “active” to receive a bonus, will not suffice to remove the employee’s common law right to damages, including damages in lieu of the bonus.

In fact, the Matthews decision goes even further than this. It indicates that where a contract contains a term removing the employee’s common law right to damages upon termination “with or without cause,” this language will not suffice to remove the right to damages upon wrongful dismissal: the limiting term must cover the exact circumstances which have arisen, and “termination without cause” does not imply “termination without notice.”

The decision even goes so far as to suggest that a clause that expressly removes an employee’s right to damages in the event of an unlawful termination may not achieve its intended purpose, because, for the purpose of calculating wrongful dismissal damages, employment contracts are not treated as “terminated” until after the reasonable notice period expires.

Takeaway

The implications of the Matthews decision are significant, wide-ranging, and potentially applicable to many existing employment contracts.

The Supreme Court makes it clear that in order for an employer to limit an employee’s right to receive payment, benefits and bonuses during their common law reasonable notice period – and crucially, the employee’s right to receive damages in lieu of reasonable notice – the employment contract must be highly precise and unambiguous in limiting these rights.

This is especially true regarding the employee’s common law right to damages for various contractual entitlements during the notice period, which is distinct from the contractual entitlements themselves.

Alberta-based individuals and businesses, in particular, should take note that Matthews appears to be a departure from previously settled Alberta law. In light of the decision, employers would be well advised to:

• review their existing contracts that purport to limit employees’ entitlements upon dismissal;

• seek legal advice when attempting to devise contractual terms that limit employees’ rights to payment, benefits and bonuses, such as incentive plan payouts, in the event of a termination.