Bonus Entitlements on Termination - the Decision in Matthews v. Ocean Nutrition Canada Ltd.

As we recently discussed in our blog post Variable Pay and Termination – To Pay or Not to Pay?, provisions purporting to limit employees' entitlements to bonuses and other incentive payments on termination have been a hot topic in employment law. On October 9, 2020 the Supreme Court of Canada released its decision in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26. In this case, Canada's highest court clarified when bonuses will be payable to an employee following termination.


Facts:

The employee, David Matthews, was a highly experienced chemist and senior manager with Ocean Nutrition Canada Ltd. ("Ocean"). Given his seniority, Mr. Matthews participated in Ocean's long-term incentive plan ("LTIP"). Under the terms of the LTIP, Mr. Matthews would be entitled to a significant payout if Ocean was sold (a "realization event") while he was a full-time employee of the company.

Specifically, the LTIP stated:

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.

In 2007 Ocean hired a new Chief Operating Officer. The new Chief Operating Officer took a disliking to Mr. Matthews and engaged in a four-year "campaign to marginalize Mr. Matthews", including reducing his responsibilities and repeated incidents of dishonesty. As a result of this poor treatment, Mr. Matthews left his employment with Ocean in June 2011.

Approximately 13 months later, Ocean was sold, thereby triggering a payout to employees under the LTIP. Mr. Matthews was not provided with a payment. Ocean took the position that Mr. Matthews was not a full-time employee of Ocean on the date of the sale and thus was not entitled to receive a payment.

Shortly thereafter, Mr. Matthews took the matter to court claiming that he was constructively dismissed from Ocean, and that Ocean had acted in bad faith. He sought damages in lieu of reasonable notice and an amount for the loss of the LTIP payment.


Decisions of the Lower Courts:

At trial, the Supreme Court of Nova Scotia concluded that Mr. Matthews had been constructively dismissed and was entitled to a reasonable notice period of 15 months. Importantly, the trial judge held that because the terms of the LTIP did not unambiguously limit or remove Mr. Matthews' entitlement to common law damages, he was entitled to damages equal to the payment he would have received under the LTIP.

On appeal, the Nova Scotia Court of Appeal agreed that Mr. Matthews was constructively dismissed and owed 15 months of reasonable notice. However, the majority of the Court disagreed on the issue of the LTIP payment, concluding that Mr. Matthews had no entitlement to damages for the loss of the payment.


Supreme Court Decision:

Mr. Matthews went to the Supreme Court of Canada on the issue of his LTIP.

There, the Supreme Court of Canada restored the trial judge's decision, finding that Mr. Matthews was entitled to damages in lieu of his LTIP payment.

In reaching this conclusion, the Supreme Court emphasized that it is an implied term of every contract of employment that employees will receive reasonable notice of termination of employment. During the reasonable notice period, the employee is presumptively entitled to receive their full compensation package, including benefits and bonuses.

The Supreme Court held that if an employer fails to provide reasonable notice, the quantum of damages will be determined by asking the following 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 that common law right?

With respect to the first question, the Supreme Court confirmed that if a benefit or bonus would have been paid during the reasonable notice period the employee is prima facie entitled to receive it. It is only necessary to consider whether the benefit or bonus is an "integral" part of compensation if there is a dispute about whether the benefit or bonus would have been payable.

In this case, it was uncontested that had Mr. Matthews been employed for the 15-month reasonable notice period, he would have been entitled to the LTIP payment on the sale of Ocean. Further, the language in the LTIP requiring him to be a full-time employee on the date of the sale did not clearly or unambiguously remove his common law rights.

In light of the admittedly poor conduct of Ocean in the period leading up to Mr. Matthews' termination, numerous arguments were advanced about employers' obligations to act in good faith. Although no specific findings were made on this topic, the Supreme Court re-iterated that a claim for breach of the duty of good faith is "wholly distinct" and separate from claims for failure to provide reasonable notice.


Key Takeaways:

This decision reflects the recent trend in employment case law of narrowly interpreting limiting terms and conditions contained in employment agreements or plans. While employers remain free to contractually limit employees' common law rights on termination, only absolutely clear and unambiguous language will be sufficient. In certain circumstances, it may even be necessary to specifically draw employees' attention to the limiting terms.

Prior to entering into employment agreements, both employers and employees should seek legal assistance. Lee Workplace would be happy to assist.