Written by Katie Brack, Kelly Santini LLP, Ottawa
Last Friday, the Supreme Court of Canada (“SCC”) released its decision David Matthews v. Ocean Nutrition Canada Limited, 2020 SCC 26, overturning the Nova Scotia Court of Appeal and restoring the trial judge’s decision.
This long-awaited case on wrongful dismissal clarified if and when additional compensation, such as bonuses or long-term incentive plan payouts, are owed to employees who are constructively dismissed or terminated without cause from their employment.
The SCC relied on first principles of employment law and clarified some of the ongoing country-wide debate on such compensation, particularly between provinces at the appellate court level. The SCC affirmed the approach Ontario courts have taken in interpreting bonus entitlements during notice periods. The takeaway is that an employment contract must expressly, clearly, and unambiguously remove an employee’s common law right to a bonus or other incentive payment during any common law reasonable notice period.
Finally, the Court also declined to apply Bhasin v. Hrynew, 2014 SCC 71 [Bhasin], and left the question of whether there is a duty of good faith in contractual performance of employment contracts for another day.
What is the Case About?
The employee, David Matthews, was a senior chemist with Ocean Nutrition Canada and worked there from 1993 to 2011 when he resigned and sued for constructive dismissal. In 2007, Ocean had hired a new CEO who engaged in a campaign to marginalize Mr. Matthews’s role in the company.
Mr. Matthews, as a senior executive, was part of Ocean’s long-term incentive plan (“LTIP”) which offered an opportunity for a large bonus, should the company be sold. The LTIP was both an incentive and a retention tool, which rewarded Mr. Matthews for past contributions.
Despite the horrible treatment by the CEO, Mr. Matthews stayed in order to collect on the LTIP, but ultimately in June 2011 he resigned. In July of 2012, a little over a year later, Ocean was sold and, if Mr. Matthews had still been an employee, he would have received a 1.1 million dollar payout under the LTIP. As part of Mr. Matthews’s claim for constructive dismissal, he sought damages for the amount of the LTIP he would have received if he was working for Ocean when the company was sold.
Lower Court Decisions
All courts held that Mr. Matthews was entitled to a 15-month reasonable notice period under the common lawand damages for the salary he would have earned during that period. At issue for the SCC to decide was whether he was entitled to damages for the LTIP that vested during the 15-month notice period.
Although the trial judge found that Mr. Matthews was entitled to the LTIP, the Court of Appeal split on this issue with the majority finding he was not entitled to it. The majority took a narrow contractual interpretation view and based on the language of the LTIP found that Mr. Matthews was not entitled to the payout. At issue was the exclusion clause in the LTIP which provided:
2.03 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 [The LTIP] 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 any severance calculation. [emphasis added]Key contract clauses on bonus entitlement
The majority held that this provision expressly excluded Mr. Matthews from any entitlement to damages equal to the LTIP during his notice period.
What did the SCC Decide?
The SCC was unanimous in its decision that Mr. Matthews was entitled to the LTIP payment as it fell within the reasonable notice period of 15 months.
The SCC further held that an employee is entitled to damages for the lost opportunity of a bonus or other incentive payment during the common law reasonable notice period. When an employee is dismissed without cause or as a result of constructive dismissal, they are entitled to wrongful dismissal damages for the breach of the implied term in the employment contract to provide reasonable notice of termination.
The SCC held that the Court of Appeal erred by focusing on whether the terms of the LTIP were plain and ambiguous and instead should have focused on whether the damages owed to Mr. Matthews for reasonable notice included an amount for the LTIP. Mr. Matthews did not receive additional damages for a bad faith dismissal due to the unfair nature of his constructive dismissal and his poor treatment by his superior because these additional damages were not pleaded.
The SCC followed case law in Ontario, particularly, Paquette v. TeraGo Networks Inc., 2016 ONCA 618. The test for determining whether an employee is entitled to a bonus as part of their damages for wrongful dismissal is:
- Whether, but for the termination, the employee was entitled to the bonus or benefit during the reasonable notice period; and
- Whether the bonus plan or contract unambiguously alters, removes, limits, or takes away the employee’s common law right to a bonus in a notice period.
The requirement of “active” or “full time employment” in bonus plans has little meaning as this language is not enough to exclude an employee from entitlement to damages for the amount of a bonus if it falls within the notice period.
Any exclusion clause must cover the exact circumstances of the termination or dismissal. In this case, the LTIP did not include language that expressly excluded receipt of the bonus if Mr. Matthews was unlawfully terminated and the bonus fell within the reasonable notice period, only if he was terminated with or without cause. The SCC held, at para 66:
[F]or 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.Supreme Court of Canada, Matthews v. Ocean Nutrition Canada
The SCC clarified that there is only an implied term for reasonable notice and not pay in lieu of notice. Any payment received in lieu is damages for breach of a failure to provide reasonable notice. The Court also noted that in certain cases it may also be appropriate to “examine whether the clauses purporting to limit or take away an employee’s common law right were adequately brought to the employee’s attention” (para 76).
Bad Faith and the Duty of Honest Performance
Regarding the application of good faith and the duty of honest performance under the employment contract, the Court declined to make a firm ruling, as the issue was not before the trial judge and was not properly argued.
The SCC, following Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10 and Bhasin, reaffirmed that “the duty of honest performance […] is applicable for employment contracts.” The SCC also reaffirmed that when awarding damages for mental distress flowing from a bad faith dismissal, a court may examine events leading up to the dismissal, and is not confined to those actions by the employer at the precise moment of termination.
Katie Brack, “Case Summary and Comment on David Matthews v. Ocean Nutrition Canada Limited” Canadian Law of Work Forum (October 13 2020): http://lawofwork.ca/?p=13036