The Supreme Court of Canada recently released its decision in Matthews v. Ocean Nutrition Canada Ltd. This highly anticipated decision dealt with the entitlement to bonuses and long-term incentive plan amounts in assessing wrongful dismissal damages. The Court concluded that such language will only be effective where the contract language clearly and unambiguously limits or removes the employee’s right to damages based on the loss of those entitlements. Language requiring active service, or referring to termination with or without cause will not suffice. Essentially, the language must state that no damages may be awarded in respect of lost bonus or incentive opportunity in order to avoid amounts that would have been earned or vested over the proper notice period being included in the assessment of damages. Otherwise, had the employee been provided proper advance notice of termination, he or she would have met the active service requirement and been entitled to such payments. Going forward, we expect courts to subject such language to close scrutiny. Employers should review the language in their employment contracts and incentive plan documents to ensure that it will withstand challenge. The Court also offered some clarification around the “duty of honest performance” in relation to employment contracts.
The case dealt with an employee, Mr. Matthews, who was an experienced chemist employed by Ocean Nutrition Canada (the “Company”) for approximately fourteen years. In the final years of his employment, a new Chief Operating Officer at the Company subjected Mr. Matthews to a “campaign” of marginalization. The relevant allegations included reductions to Mr. Matthews responsibilities, lying to Mr. Matthews, and ignoring Mr. Matthews’ requests to speak with him. Mr. Matthews ultimately left the company in 2011, taking a position with a new employer.
As a senior executive, Mr. Matthews had participated in the employer’s long-term incentive plan (“LTIP”). Under that program, the sale of the Company would trigger significant payments to employees. The Company was in fact sold approximately 13 months after Mr. Matthews’ departure. Had Mr. Matthews been employed at the time of the sale, he would have been entitled to a payment under the LTIP of just under $1.1 million.
Mr. Matthews sued the Company, alleging that he had been constructively dismissed and that the constructive dismissal had been carried out in breach of the Company’s duty of good faith. Mr. Matthews sought, inter alia, wrongful dismissal damages for loss of pay, bonuses, and benefits. The Company took the position that, since Mr. Matthews was not actively employed on the date of the sale, he did not qualify for the bonus under the terms of the plan.
The trial judge concluded that the test for constructive dismissal had been satisfied, both due to the unilateral reduction in responsibilities to which Mr. Matthews was subjected, and the fact that the Company’s senior manager engaged in a course of conduct aimed at minimizing Mr. Matthews’ influence and participation in the Company, reasonably leading Mr. Matthews to feel that the Company had evinced an intention to no longer be bound by the contract of employment.
The trial judge relied upon appellate court jurisprudence from Ontario to find that Mr. Matthews was entitled to damages equivalent to what he would have received under the LTIP because (a) had he not been constructively dismissed, he would have been a full-time employee, and (b) the terms of the LTIP did not unambiguously limit or remove his common law right to damages.
Court of Appeal of Nova Scotia
On appeal, the majority disagreed that Mr. Matthews was entitled to damages for the lost LTIP payment. They looked to the following clauses in the LTIP:
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.
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.
In their view, clause 2.03 unambiguously eliminated Mr. Matthews’ right to recover the payment once he departed the Company. Moreover, they held that clause 2.05 clearly stated that the LTIP could not be used for severance purposes.
Supreme Court of Canada
The Supreme Court of Canada allowed the appeal and restored the award of the trial judge.
Kasirer J., writing for the Court, first clarified the appropriate method of analysis to be applied to the claim. The Court noted that Mr. Matthews had alleged two different types of contractual breaches. The first related to his entitlement to reasonable notice on termination while, in parallel, Mr. Matthews had alleged that his termination was a breach of contract because it did not meet the expected standard of good faith.
With respect to the first avenue, the Court noted that a breach of the obligation to provide reasonable notice does not turn on the presence or absence of good faith; rather, the breach simply gives rise to an award for damages in lieu of such notice. As to the second avenue, the Court confirmed existing case law holding that a failure to act in good faith during the manner of dismissal can lead to foreseeable, compensable damages. These damages are not paid via an extension of the notice period, because the nature of the contractual breach is different from that associated with the failure to provide reasonable notice.
Moving on to assess Mr. Matthews’ entitlement to the LTIP payment, the Court confirmed that the analysis set out by the Ontario Court of Appeal in Paquette v. TeraGo Networks Inc. is the correct approach to be followed. When employees sue for damages for constructive dismissal, they are not claiming the disputed benefits themselves, but are claiming damages for the lost opportunity to earn such compensation over the period of notice. The Court adopted Paquette’s two-step approach for analyzing claims for the loss of bonuses or incentive plan entitlements as part of damages for wrongful dismissal:
- First, would the employee have been entitled to the bonus or benefit as part of their compensation during the proper notice period?; and
- If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
Under the first step, the Court held that Mr. Matthews was prima facie entitled to receive damages as compensation for the lost bonus under the LTIP.  The payment would have been triggered during his 15-month notice period and it was not discretionary, so it was clear that he would have been entitled to the payment as part of his compensation had he been employed at the time.
Under the second step, the terms of the LTIP (cited above) did not unambiguously limit or remove Mr. Matthews’ common-law rights. The Court held that language requiring an employee to be “full-time” or “active” is not sufficient to limit an employee’s common law right to damages because, had Mr. Matthews been provided proper notice of termination, he would have been “full time” or “active” for the duration of the notice period. Moreover, language purporting to remove an employee’s common law right to damages on termination “with or without cause,” or even upon an unlawful termination, is also insufficient to limit an employee’s entitlement, because had he been lawfully terminated, the termination would only have occurred at the end of the notice period.
The Court also addressed some confusion which had arisen among lower courts, clarifying that the common law only implies an obligation to provide reasonable advance notice of termination, not an obligation to provide pay in lieu of reasonable notice.
On the subject of good faith and the duty of honest performance of employment contracts, the Court confirmed that the duty of honest performance simply means that parties “must not lie [to] or otherwise knowingly mislead” their counterparty “about matters directly linked to the performance of the contract.” Where an employee alleges a breach of the duty of good faith in the manner of dismissal, courts are able to examine alleged misconduct during the course of the employment relationship leading up to the dismissal, not simply at the time of dismissal. However, the Court declined to decide whether a broader duty of good faith exists during the life of the employment contract.
Takeaways for Employers
Going forward, the courts will closely scrutinize bonus and incentive plan language to determine whether there is an unambiguous limit on employees’ common law entitlements. The key principle articulated by the Court in Matthews is that exclusion clauses must cover the exact circumstances which have arisen and must clearly and unambiguously limit or remove an employee’s entitlements to damages during the notice period. Language which merely requires an employee to be “actively employed” to be entitled to the bonus will no longer suffice to limit damages for amounts that would have been earned or vested during the proper notice period. Employers should review the language contained in employment contracts and incentive plans to determine whether it unambiguously provides that no amounts in respect of the plan can be included in calculating damages for wrongful dismissal.