Written By Mary Thibodeau
The Supreme Court of Canada (“SCC”) recently clarified whether an employee who has been terminated from employment is entitled to bonuses during the notice period in the case Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26.
Facts
Mr. Matthews, an experienced chemist, had held several senior management positions with Ocean Nutrition Limited (“Ocean”) beginning in 1997 until he was constructively dismissed in 2011. Mr. Matthews participated in, and was entitled to, Ocean’s long-term incentive plan (“LTIP”)—a bonus system. Under the LTIP, the sale of the company would trigger a “Realization Event”, where employees who qualified under the plan would receive a bonus payment. The LTIP was a key reason for which Mr. Matthews wanted to stay employed with Ocean, anticipating the company would soon be sold.
The terms of the LTIP contained provisions in relation to termination of employment, appearing to limit entitlement as follows:
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 or 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 the 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.
In 2007 Ocean hired a new chief operating officer, who began to limit Mr. Matthews’ responsibilities and lie to him about the security of his employment and future prospects with Ocean. Mr. Matthews was also placed under review and warned that a possible outcome would be his dismissal from the company. At this time Mr. Matthews grew suspicious that Ocean was conducting due diligence for a possible sale of the company, a process in which he would have normally been involved but now found himself excluded.
Unable to tolerate the negative treatment from Ocean any longer, Mr. Matthews eventually left the company in 2011, and accepted employment elsewhere. Soon after, Mr. Matthews’ suspicions that Ocean was preparing for a sale were confirmed, and the company was sold – 13 months after Mr. Matthews had left his employment. While other eligible employees received a payment under the LTIP as per the Realization Event, Mr. Matthews did not. Ocean took the position that because Mr. Matthews was no longer employed with Ocean, he did not satisfy the terms of the LTIP and was not entitled to the bonus.
Shortly thereafter, Mr. Matthews sued Ocean for constructive dismissal, claiming 15 months of pay in lieu of notice and damages equivalent to what he would have received under the LTIP. He also alleged that the constructive dismissal was carried out in bad faith.
Judicial History
Mr. Matthews’ claim for constructive dismissal was upheld at trial, with the judge agreeing that he was also owed damages equivalent to what he would have received under the LTIP. In awarding damages for the LTIP, the trial judge reasoned that Mr. Matthews would have been a full‑time employee when the Realization Event occurred had he not been constructively dismissed, and the terms of the LTIP did not unambiguously limit his common law right to damages.
The Court of Appeal unanimously upheld the trial judge’s finding that Mr. Matthews had been constructively dismissed but was divided on whether Mr. Matthews was entitled to damages on account of the lost LTIP payment. A majority of the Court of Appeal determined that Mr. Matthews was not entitled to the LTIP payment.
Mr. Matthews appealed to the Supreme Court of Canada, which unanimously upheld his appeal and restored the trial judgment in favour of Mr. Matthews.
Entitlement to Bonus During Notice Period
At the Supreme Court of Canada, the issue as to whether Mr. Matthews had been constructively dismissed and was entitled to pay in lieu of notice was no longer in dispute. Rather, the issue before the Court was Mr. Matthews’ entitlement to the LTIP, or, whether the failure to provide damages for reasonable notice includes the payment of a bonus which an employee would have received had they still been employed.
The Court determined that the majority of the Court of Appeal had erred by focusing on whether the terms of the LTIP were “plain and unambiguous” instead of asking what damages were appropriately due to Mr. Matthews as a result of Ocean’s failure to provide him with reasonable notice. The Court reasoned that the issue is not whether Mr. Matthews is entitled to the LTIP itself, but rather what damages he is entitled to as a result of his constructive dismissal. This question focuses the analysis on whether Mr. Matthews was entitled to compensation for bonuses he would have earned had Ocean not breached his employment contract. (at para 48)
The Court noted the key questions to be asked in determining entitlement to bonuses or other benefits involve examining whether, but for the termination, the employee would have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period. If this is the case, then the next step is to determine whether the terms of the employment contract or bonus plan unambiguously take away or limit that common law right. In so doing, the Court affirmed the test set out by the Ontario Court of Appeal Paquette v. TeraGo Networks Inc., 2016 ONCA 618 for determining whether the damages for pay in lieu of notice should include bonus payments or benefits:
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?
As there was no such limitation to the bonus in Mr. Matthews’ employment contract, his entitlement to the LTIP bonus that he would have earned but for his constructive dismissal stood.
Duty of Honest Contractual Performance
At further issue, was Mr. Matthews’ allegations of employer dishonesty and the impact of this alleged dishonesty. In this regard, Mr. Matthews had pointed to the duty of honest contractual performance as set out in Bhasin v. Hrynew, 2014 SCC 71 citing Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701 and Honda Canada Inc. v. Keays, 2008 SCC 39, [2008] 2 S.C.R. 362.
The Court concluded it was not necessary to fully answer Mr. Matthews’ allegations of dishonesty as the appeal could be resolved on settled employment law principles, despite agreeing that the employer had treated Mr. Matthews in a dishonest manner over a lengthy period. Further, the Court noted that “surprisingly” Mr. Matthews had not made a specific claim for damages for mental distress, yet insisted that the employer breached its obligations of good faith when he was lied to in the run up to the constructive dismissal.
The Court also took the opportunity to clarify the duty of good faith in the contract of employment. The Court observed that although the law is settled that a violation of the duty of good faith is a distinct contractual breach from a breach of the employment contract, the complaints are often conflated together, as they had been in this case by Mr. Matthews. The Court cautioned that where these claims are alleged together, damages for a breach of the duty of good faith must also be appropriately pleaded and causation established. Courts should also ensure they are following a “methodologically coherent approach” to constructive dismissal cases, as this can of course affect the ultimate damage amount to be awarded to an employee plaintiff. (at para 39)
Conclusion
This case represents a clarification to the somewhat muddied issue of entitlement to bonuses earned within the notice period. Lawyers acting for employees have historically asserted an employee’s entitlement to such bonuses, as they would assert the employee’s entitlement to have their benefits continue throughout the notice period. In this regard, this case does not represent a significant change to the legal landscape. However, it does serve to clarify some of the more divergent case law from the lower courts. It is a welcome development for employees in terms of affirming their rights to an employment contract which is not considered “terminated” until after the reasonable notice period expires.