In a ruling that will have significant implications for employment law in Canada, the Supreme Court of Canada (“SCC”) released its reasons last week in Matthews v. Ocean Nutrition Canada Ltd.. In Matthews, the SCC has helped to clarify the law regarding an employee’s entitlement to bonuses or other additional compensation as damages when they are terminated (or constructively dismissed) without cause from their employment.
The unanimous Court in Matthews overturned the Court of Appeal of Nova Scotia (“CA”) and found that David Matthews, an executive constructively dismissed by his company, Ocean Nutrition, was entitled to payment of a bonus under the company’s long term incentive plan (“LTIP”), despite language under the plan that appeared to be to the contrary.
The SCC held that because Mr. Matthews was constructively dismissed without notice, he was entitled to damages representing the salary, including bonuses, he would have earned during his 15-month reasonable notice period.
DAmages in Lieu of Reasonable Notice
The primary legal issue addressed by the Court in Matthews was whether the Appellant’s entitlement to damages in lieu of reasonable notice included his lost LTIP payment. The Appellant would have been entitled to the LTIP payment as an employee of the company when it was sold 13 months after his departure. The sale of the company, being a “realization event” under the LTIP plan, triggered payments to qualifying employees under the LTIP, including Mr. Matthews. However, Mr. Matthews was denied the LTIP payment on the grounds that he was not actively employed by the company on the date of the sale.
In its reasons, the SCC held that the majority of the CA “erred by focusing on whether the terms of the LTIP were “plain and unambiguous” instead of asking what damages were appropriately due for Ocean’s failure to provide Mr. Matthews with reasonable notice. The issue is not whether Mr. Matthews is entitled to the LTIP in itself, but rather what damages he is entitled to and whether he was entitled to compensation for bonuses he would have earned had Ocean not breached the employment contract.”
Two-part test to determine damages
- Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?
- If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
With regard to the second part of the test, the SCC explained:
- The question is not whether the terms are ambiguous but whether the wording of the plan unambiguously limits or removes the employee’s common law rights; and
- Because the LTIP is a “unilateral contract”, in the sense that the parties did not negotiate its terms, clauses excluding or limiting liability will be strictly construed.
The Court did not rule on the application of the duty of good faith and the duty of honest performance in the context of an employment contract, finding that the right to reasonable notice is separate from the duty of good faith, and violation of a duty of good faith is a distinct contractual breach.
Application of Matthews to Employment Contracts
In declining to directly apply the principles of good faith and honest performance to its findings in Matthews, employers should nonetheless heed the SCC’s comment that the courts [in Canada] examine the employment relationship retrospectively, and good faith is not merely owed at the very end of the relationship. Employers should be mindful that the duties of good faith and honest performance apply through the entire employment relationship, and the SCC may consider this legal issue in the future.
Employers should also be aware that provisions in unilateral contracts (i.e. contracts that are not negotiated, including LTIP and bonus plans) will be strictly construed by courts. When drafting such agreements, provisions must be absolutely clear and unambiguous. Language requiring an employee to be “full-time” or “actively employed” will not suffice to remove an employee’s common law right to damages, including lost incentive compensation and bonuses.
The application of Matthews to the interpretation of employment agreements and bonus plans going forward along with its impact on employers’ obligations to employees on termination is expected to be nothing short of transformative. As a result, it is highly recommended that employers seek legal advice when wishing to limit damages owed to an employee during the reasonable notice period through contractual terms and, similarly, that employees who have been dismissed seek legal advice on the offers made to them on termination so as to be certain that any significant damages to which they are entitled are not left ‘on the table’.
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