Oct 16, 2020  By John Hyde

The Supreme Court of Canada confirms $1 million bonus payment to constructively dismissed employee

A long-awaited decision from the Supreme Court of Canada in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 has provided much-needed clarity concerning an employee’s entitlements upon dismissal.  Employers and employees should pay close attention. 

The case involved an experienced chemist, David Matthews, who worked his way up to a senior management position at Ocean Nutrition Canada Limited (“Ocean”) over his 14-year career at the Company.  Part of Matthews compensation included a Long-Term Incentive Plan (“LTIP”), which would entitle him to a significant payment upon the sale of the Company.  Unfortunately for Matthews, his deep affection for the Company was not mutual. Over his last four years of employment, the executive team engaged in a “campaign to marginalize him” through dishonest conduct. Matthews eventually had enough and resigned in 2011. Thirteen months after his resignation, Ocean was sold for $540 million.

The ultimate question to be decided by the Supreme Court was whether Matthews was entitled to an approximately $1 million bonus on account of the sale of the Company.

In Canada, it is an implied term of every employment contract that, an employee can be dismissed without cause upon the provision of reasonable notice, which is determined in accordance with the relevant factors at common law. With proper contractual drafting, these entitlements can be limited to those under statute or other specified terms. 

It is also the law that an employer can “constructively” dismiss an employee through its conduct, absent an express decision to terminate the employee. While this often involves a factual hurdle for the employee to prove, if successful, the employee would be deemed to be dismissed without cause and, receive the entitlements which follow. 

Both lower courts in this case agreed that Ocean’s conduct amounted to constructive dismissal.  But was Matthews entitled to the $1 million bonus? 

In answering this question in favour of Matthews, the Supreme Court used the opportunity to clarify the state of the law for dismissed employees.

The first issue to be addressed, was the impact of an employer’s dishonest conduct on a dismissed employee’s entitlements. The Court confirmed that, because an employer has a duty of honest performance and good faith throughout the duration of an employee’s contract up to and including the exact moment of termination, a dismissed employee can claim damages for mental distress on account of the employer’s dishonest conduct. This, however, is a separate issue from the employee’s entitlements to reasonable notice, which would purportedly include, for example, an LTIP payment.  As Matthews did not allege any damages for mental distress, his lawyers attempted to claim that the dishonest conduct was relevant to the determination of the LTIP.  The court did not accept that argument.  It was also not necessary to resolve the LTIP issue.

In deciding the LTIP issue, the court reminded employers and employees that, since the failure to provide reasonable notice is a breach of an implied term of an employee’s contract, it presumptively entitles that employee to damages representing everything the employee would have earned had they continued working during the notice period, including any bonuses and benefits

In Matthews’ case, had he remained employed for the 15-month notice period, he would have received the $1 million LTIP payment upon the sale of the company. 

Once it was determined that Matthews would have received the disputed amount during the notice period, the next question was whether, as the court put it, “the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?”  In this case, the answer was “no.”

Particularly notable for employers is that, the Court reached this conclusion despite the LTIP language which, ostensibly, had expressly attempted to avoid this precise outcome from occurring.  The LTIP stated that it “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” and, further that it should “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.”

Nevertheless, this language failed to be “absolutely clear and unambiguous”, for a variety of technical reasons articulated by the Supreme Court. It therefore did not displace Matthews’ common law entitlement to the bonus payment.

For employers, the lesson is that, expert drafting of employment contracts and bonus plans is increasingly critical.  It is a complex area of  law, which even companies that sell for over half a billion dollars can get wrong. Unless contracts and bonus plans are expertly drafted, our highest courts will eagerly interpret them in favour of employees. The costs can be significant. 

On the other hand, executive employees will want to think twice about signing off on any severance package which purports to provide them with anything less than what they would have received had they continued working.  Any such offer should be quickly reviewed with an employment lawyer to ensure nothing is being left on the table.

The impact of this case is not limited to LTIPs and in fact, all types of bonus are subject to scrutiny.

The lawyers at Hyde HR Law are at the cutting edge of all the latest developments in this area of law- which is constantly evolving. If you have any questions about your employment contracts and/or bonus plans in light of this decision, please contact Hyde HR Law for a consultation with one of our expert attorneys.      

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