The Supreme Court of Canada recently rendered its decision in Matthews v Ocean Nutrition Canada Limited ("Matthews"), a case which considered whether a dismissed employee was entitled to a payment under a Long Term Incentive Plan ("LTIP"), despite no longer being employed.

The Matthews decision confirms a two-step approach established by lower courts to determine if an employee is entitled to be paid a bonus or LTIP despite no longer being actively employed. First, courts should examine whether the employee would have been entitled to the bonus during the reasonable notice period but for the dismissal. Second, courts should determine whether there is something in the bonus plan that would specifically remove the employee's common law entitlement.

In other words, if a dismissed employee would otherwise be entitled to a bonus payment, is there clear and unambiguous language to exclude or limit that entitlement during the common law reasonable notice period?

Background

Mr. Matthews was employed as a senior executive by Ocean Nutrition Canada Ltd. ("Ocean") from January 1997, until his resignation in June 2011. Because of his position, Mr. Matthews was entitled to participate in Ocean's LTIP, which provided for certain payments to employees on the occurrence of a "Realization Event," such as the sale of the company.

In 2007, Ocean hired a new Chief Operating Officer, who reduced Mr. Matthew's responsibilities with Ocean. He also misled Mr. Matthews about his status and prospects with Ocean. Despite these difficulties, Mr. Matthews continued to work for Ocean anticipating the company would soon be sold and he would receive a payment under the LTIP.

In June 2011, Mr. Matthews sought employment elsewhere and resigned. Ocean was sold for $540 million roughly 13 months after Mr. Matthews' resignation, which constituted a Realization Event under the LTIP and triggered bonus payments to qualifying employees. Ocean took the position that Mr. Matthews did not qualify for an LTIP payment because he was not an employee. The specific language of the LTIP provided for the following:

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 and 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 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.

Mr. Matthews filed an application against Ocean alleging that he had been constructively dismissed and that Ocean carried out the constructive dismissal in bad faith and in breach of its obligations. He sought damages for pay in lieu of reasonable notice, which included a claim for the loss of a payment under the LTIP.

Both the trial judge and the Court of Appeal found that Mr. Matthews had been constructively dismissed and that the appropriate reasonable notice period at common law was 15 months. There was a divergence on the question of whether Mr. Matthews was entitled to a payment following the Realization Event, given the language of the LTIP. The trial judge found that damages were owing, whereas the Court of Appeal found the LTIP language sufficiently clear to oust the common law.

The Supreme Court Decision

In a unanimous decision, the Supreme Court found that Mr. Matthews was entitled to damages for the loss of the LTIP payment, resulting from the breach of his employment agreement. For Mr. Matthews this represented nearly $1.1 million.

In reaching that conclusion, the Supreme Court reiterated that it is an implied term of every employment agreement that an employee receives reasonable notice upon termination, unless otherwise limited by contract. Employees dismissed without reasonable notice are entitled to damages for the breach of this implied term, and those damages are "fully loaded," meaning that they include all salary and benefits including bonuses that an employee would have earned had the employee continued to work through the reasonable notice period.

The Supreme Court clarified that the issue was not whether Mr. Matthews was entitled to an LTIP payment, but rather if he was entitled to damages for Ocean's failure to provide him with reasonable notice, in breach of his employment contract. Specifically, the Supreme Court confirmed that the "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."

The Supreme Court endorsed the approach taken by the Ontario Court of Appeal in Paquette v TeraGo Networks Inc., 2016 ONCA 618. Specifically, Courts should consider the following two questions in order to determine whether damages in lieu of notice should include bonuses:

  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?

In applying this framework to Mr. Matthews' specific situation, the Court answered the first question in the affirmative. If Mr. Matthews had worked through the 15-month reasonable notice period, he would have been employed when the Realization Event occurred and would have qualified to receive the LTIP payment.

Regarding the second question, the Supreme Court found that the language of the LTIP did not unambiguously limit or remove Mr. Matthew's common law right to damages. Specifically, the Court raised the following issues with the exclusions of the LTIP:

  • Clause 2.03 requiring an employee to be "full-time" or "active" did not suffice to remove an employee's common law right to damages. If Mr. Matthews had been given proper notice, he would have been "full-time" or "actively employed" throughout the Realization Event.
  • Clause 2.03 that purported to remove an employee's common law right to damages upon termination "with or without cause" was not sufficiently unambiguous. Mr. Matthews was unlawfully terminated because he was constructively dismissed without notice. Therefore, the clause did not cover the exact circumstances that had arisen.
  • Clause 2.05 purported to limit LTIP payment in a severance payment, which was not sufficient because there is a difference between severance and damages. Matthews' entitlement to the LTIP payment arose because of his entitlement to damages, which was not specifically excluded.
  • Clause 2.05 suggested that the LTIP "does not have any current or future value other than on the date of a Realization Event." Again, if Mr. Matthews had received proper notice of termination he would have qualified on the date of the Realization Event for an LTIP payment.

Gowling WLG Focus

The Supreme Court of Canada's decision does not appear to diverge from prior cases determining employee entitlement to non-discretionary incentive compensation following termination.  It remains clear that non-discretionary incentive compensation plans require robust language to oust the common law presumption that such payments apply during the reasonable notice period. There is no doubt that the threshold is high – but not insurmountable – for employers that wish to limit their liability with respect to post-employment incentive compensation payments. The Supreme Court has now provided an analytical framework against which to measure the enforceability of exclusionary clauses in any such plan, which require very carefully and precisely drafted language. Employers should review their incentive compensation plans to ensure compliance with the Supreme Court's latest pronouncement in Matthews.

For any questions you may have about incentive compensation pay plans and employee entitlements, the Gowling WLG Employment, Labour & Equalities Group would be pleased to assist. To find out more about our Group, and how to contact a specific lawyer, click here.