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The million dollar question: is an employee entitled to a post-termination bonus payment?

Killian McParland

Earlier today, the Supreme Court of Canada released a new decision with significant implications for employers in Matthews v. Ocean Nutrition Canada Ltd. While the underlying case came out of Nova Scotia, it is relevant to employers across Canada.

Background

Mr. Matthews was a chemist and occupied several senior management positions at Ocean Nutrition in Nova Scotia where he assisted the company in making omega-3 products. As part of his employment, Mr. Matthews participated in a Long Term Incentive Plan (“LTIP”) that provided for a significant bonus payment in the event Ocean Nutrition was sold.

In 2007, Ocean Nutrition hired a new Chief Operating Officer (“COO”). Mr. Matthews and the COO did not get along. The Court found that, over time, the COO reduced Mr. Matthews’ job responsibilities and lied to him about his status and future with the company.

Mr. Matthews’ evidence was that, despite this, he tried staying with Ocean Nutrition because of the LTIP and his expectation that the company was going to be sold. However, he ultimately decided that he could not stay any longer under the circumstances. He quit and brought a claim that he had been constructively dismissed.

Approximately one year later, Ocean Nutrition sold for over $500 million. Mr. Matthew’s bonus would have been approximately $1 million and he claimed this as part of his civil action. Ocean Nutrition took the position that, under the LTIP, Mr. Matthews was not entitled to the bonus because he was not employed at the time of the triggering event (the sale of the company).

The LTIP included the following clauses purporting to limit entitlements post-termination:

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.

Lower decisions

After trial, the Nova Scotia Supreme Court held that Mr. Matthews had been constructively dismissed and awarded 15 months common law “reasonable notice” of termination.

The Court also held that this included entitlement to the LTIP bonus payment. The Court held that the LTIP did not effectively restrict Mr. Matthews’ entitlement post-termination, and had Mr. Matthews remained with the company during the notice period he would have been employed when the company was sold (and the bonus payment triggered).

However, on appeal the award of the bonus payment was overturned. The Court of Appeal agreed that Mr. Matthews had been constructively dismissed and was entitled to 15 months’ notice of termination, but held that the language in the LTIP was clear that Mr. Matthews would not be entitled to the bonus payment after his employment ended, regardless of the reason.

Mr. Matthews appealed to the Supreme Court of Canada.

The Supreme Court of Canada’s decision

The Supreme Court of Canada held that Mr. Matthews was presumptively entitled to the bonus payment as part of his 15-month common law notice period, and the language in the LTIP did not effectively restrict this.

Damages for wrongful dismissal are designed to compensate an employee for the employer’s breach of an implied term of employment to provide reasonable notice of termination. The Court held that it was uncontested that the realization event (sale) occurred during the notice period and therefore, “but for” Mr. Matthews’ dismissal, he would have received the bonus payment during that period.

Where an employee would be entitled to compensation as part of a common law reasonable notice period, a court must determine whether the employment contract or bonus plan clearly and unambiguously takes away that common law right. Like the trial judge, the Supreme Court found that the LTIP did not achieve this, emphasizing that if the common law notice period had been provided, Mr. Matthews would have been a full-time employee.

As part of his submissions, Mr. Matthews had also claimed entitlement to the bonus payment on the basis that Ocean Nutrition had acted in bad faith. Ultimately, the Supreme Court did not make any decision on this issue because it determined that Mr. Matthews was entitled to the bonus payment anyway as part of his reasonable notice period. Nonetheless, the Supreme Court went on to make the following points:

  • Additional damages can be awarded for bad faith separate from those awarded for wrongful dismissal.
  • Claims of employer bad faith “in the manner of dismissal” are not limited to the exact moment of dismissal, but there must be some connection. In a case such as this, where the employer was found to have constructively dismissed the employee based on a course of conduct over a period of years, the relevant time period was potentially extensive.
  • In the circumstances of this case, the Supreme Court declined to determine whether employers have a broader duty of good faith during the entire life of the employment contract.

The Supreme Court highlighted that in this case there was no basis for awarding additional damages for bad faith because Mr. Matthews had not pursued any claim beyond the bonus payment during the proceedings.

Quick takeaways for employers

The decision was released just a few hours ago and there will no doubt be debate regarding its implications in specific cases. Nonetheless, employers should immediately note the importance of:

  1. Carefully drafted and communicated employment agreements and incentive plan documents: There is a high bar to effectively restrict post-termination compensation entitlements that presumptively exist under the common law. Language that might appear sufficient – such as requiring “full-time” or “active” employment – may not be. Ideally, this is addressed directly in employment agreements, which did not occur in this case. Today’s guidance from the Supreme Court of Canada presents a good opportunity to review not only how these documents are drafted, but how key terms are communicated to employees.
  2. Ensuring employees are treated with good faith: While it ultimately did not occur in this case, the Supreme Court highlighted that employer can face additional liability if found to have breached its duty of good faith in the circumstances surrounding a dismissal.

This article is provided for general information only. If you have any questions about the above, please contact a member of our Labour and Employment group.

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