October 20, 2020
by Israel Foulon Wong LLP

Summary

In Matthews v Ocean Nutrition Canada Ltd, 2020 SCC 26, the Supreme Court of Canada (“SCC”) affirmed that an employee who is wrongfully dismissed is generally entitled to damages representing their entire compensation package, including any bonuses or long-term incentive compensation they “would have earned” during the period of reasonable notice had their employment contract not been breached.

Facts:

David Matthews (“Matthews”) was employed as a Chemist and Senior Manager with Ocean Nutrition Canada Ltd. (“Ocean”). Starting in 2007, Ocean hired a new Chief Operating Officer. Over the next four years, the COO engaged in a campaign to sideline Matthews and minimize his influence within the Company, such that his future was uncertain. Matthews participated in Ocean’s Long-Term Incentive Plan (LTIP), which stipulated that upon a “realization event,” which included the sale of the Company, Matthews was eligible to receive a substantial payment.

In 2011, Matthews resigned from Ocean and claimed that he had been constructively dismissed and was entitled to reasonable notice at common law, including his incentive compensation.

Lower Court Decisions

At trial, the court held that Matthews was constructively dismissed and was owed a reasonable notice period of 15 months, including his entitlement under the Company’s LTIP. On appeal, the majority of the Nova Scotia Court of Appeal overturned the trial judge’s decision. The majority held that the terms of the LTIP unambiguously removed Matthews’ common law right to claim damages under the terms of the Plan.

Supreme Court Decision

Damages for Wrongful Dismissal

The SCC provided some clarity concerning employees’ claims for wrongful dismissal at common law holding that:

• The Employer has the right to terminate an employment contract, subject to the duty to provide reasonable notice. The contractual breach arises from the employer’s failure to provide said notice.
• As a result, the employee is entitled to damages representing the compensation, including bonuses and other incentives they were eligible to receive, during the reasonable notice period.

Notably, the Court clarified that damages arising from an employer’s bad faith conduct are separate and distinct from an employer’s obligation to provide reasonable notice.

The Long-Term Incentive Plan

The SCC affirmed that courts should continue to apply the framework outlined in Paquette v TeraGo Networks Inc., 2016 ONCA 618 to determine an employee’s entitlements to bonus and incentive plans during the period of reasonable notice. As such, the court must ask the following questions:

1. Would the employee have been entitled to the bonus or benefits 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?

First, in Matthews’ case, there was no dispute that the Company’s sale occurred during the period of reasonable notice. Accordingly, the SCC held that he had a prima facie entitlement equal to the payment he would have received under the LTIP.

Second, the terms of the LTIP must be clear and unambiguous to limit an employee’s entitlements at common law. The SCC clarified that this means that the exclusion clauses must cover the “the exact circumstances” that led to the employee’s termination. Language requiring an employee to be “full-time” or “active” is ineffective; had the employee received proper notice, he would have been actively employed during the notice period. Similarly, the SCC held that language that purports to limit an employee’s entitlements if they are terminated “with or without cause” is insufficient to disentitle an employee to damages in lieu of incentive compensation where the employee was wrongfully dismissed.

Take Away for Employers

This case reaffirms Ontario appellate jurisprudence and provides some helpful clarity regarding the nature of an employee’s entitlements in a wrongful dismissal case. It further serves to highlight the importance of properly drafted employment contracts and incentive plans if an employer seeks to limit incentive compensation to the statutory notice period. Additionally, it warrants further consideration that the Court took time to recognize that where the terms of an incentive plan purport to limit or remove an employee’s entitlements, it is appropriate to examine whether the terms of the clause were adequately brought to the employee’s attention.  In light of this decision and recent case law in Ontario, it is imperative that employers have their contracts and incentive plans reviewed by counsel.