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When are employees entitled to bonuses after they’ve been terminated? A Review of the Supreme Court’s Recent Decision in Matthews v. Ocean Nutrition Canada Ltd.

5 minute read

On October 9, 2020, the Supreme Court of Canada released its decision in Matthews v. Ocean Nutrition Canada Ltd.[1] The Court’s unanimous reasons were written by its newest member, Justice Kasirer.

Mr. Matthews was a senior executive with Ocean Nutrition, having worked at the company since 1997. In 2007, Ocean Nutrition hired a new Chief Operating Officer. The relationship between Mr. Matthews and the Chief Operating Officer soured and the Chief Operating Officer engaged in what the trial judge called a “campaign” to marginalize Mr. Matthews in the company. Mr. Matthews eventually left Ocean Nutrition (in 2011) and took another position elsewhere.

As a senior executive with Ocean Nutrition, Mr. Matthews was part of the long-term incentive plan (“LTIP”). The LTIP was a contractual arrangement that provided payments when certain events happened, including when the company was sold. The trial judge found that the prospect of a bonus under the LTIP was a key reason why Mr. Matthews stayed with Ocean Nutrition, even when his difficulties with senior management arose.

Approximately 13 months after Mr. Matthews left Ocean Nutrition, it was sold for $540 million, which would have triggered an LTIP bonus for Mr. Matthews if he was still employed. Ocean Nutrition took the position that because Mr. Matthews was not employed by Ocean Nutrition at the time of the sale, he was not entitled to the LTIP bonus.

Both the trial judge and the Court of Appeal for Nova Scotia agreed that Mr. Matthews had been constructively dismissed, and was entitled to reasonable notice of his termination of 15 months. The key issue in dispute was Mr. Matthews’ entitlement to his LTIP bonus. The trial judge concluded that Mr. Matthews was entitled to $1,086,893.36 for the loss of the LTIP bonus he would have received during the notice period. The Court of Appeal disagreed.

The Supreme Court of Canada allowed the appeal and restored the trial judge’s decision.

The Court decided the case squarely on the basis of the obligation to provide reasonable notice in accordance with the terms (here, implied) of an employment contract. Generally speaking, an employer has the right to terminate the employment contract without cause, subject to the duty to provide reasonable notice.  The reasonable notice period is either set by contract, or implied at common law.  Regardless of whether an employer acts honestly or in good faith, the failure to provide reasonable notice leads to an award of damages in lieu.

When calculating damages, whether to include “non-salary” payments that would arise during the notice period, such as the LTIP bonus for Mr. Matthews in this case, has been a difficult issue for courts in common law Canada – particularly as companies have often tried to craft LTIP, stock options, and other written bonus programs to exclude so-called “non-active“, post-termination employees from participation.

Justice Kasirer reviewed and agreed with the approach taken in two recent Ontario Court of Appeal decisions, Paquette[2] and Lin[3], for determining whether to award bonus payments during the reasonable notice period.

He found that there are two questions to be asked when determining whether the quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and other benefits:

  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?

Since it was uncontested that Mr. Matthews would have received a LTIP payment but for his dismissal, the Court held there was no need to ask whether the LTIP payment was integral to his compensation.

With respect to the second question, the courts throughout had to contend with an explicit LTIP term that Matthews had to be “a full-time employee” at the time of the sale of the company to receive the LTIP bonus payment, and the LTIP arrangement would “be of no force or effect” if Matthews had by then “cease[d] to be an employee,” whether by resignation or termination, with or without cause.

Justice Kasirer held that the test required that the language in the LTIP must be “absolutely clear and unambiguous” to remove Mr. Matthews’ common law right to damages. Language requiring the employee to be “full-time” or “active” did not suffice.  If he had been given proper notice, he would have been “full-time” or “actively employed” through the notice period.  Nor could the clause limit his common law right to damages upon termination by the use of the words “with or without cause.”  He had been unlawfully terminated by not being given sufficient notice – but the acknowledgement that the company could terminate him without cause did not mean it could terminate him without notice.  The reasonable notice period would include his common law damages entitlement, which had not been unambiguously limited to exclude the LTIP bonus.

The Court’s decision in Matthews has significant implications for without cause terminations of employees; and will likely set employers and their advisors to address the language of their employee and executive incentive plans. The decision underscores that courts will award damages for foregone bonuses during the reasonable notice period unless there is very clear language that unambiguously takes away or limits the employee’s common law right.

[1] 2020 SCC 26.

[2] Paquette v. TeraGo Networks Inc., 2016 ONCA 618, 352 O.A.C. 1.

[3] Lin v. Ontario Teachers’ Pension Plan Board, 2016 ONCA 619, 352 O.A.C. 10.

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