At common law, employers have a right to terminate an employment relationship, subject to reasonable notice of termination. When an employer breaches this implied duty, employees are entitled damages for wrongful dismissal, which presumptively include damages for lost incentive compensation unless an employer unequivocally ousts that right in an employment agreement or incentive plan. In Matthews v. Ocean Nutrition Canada Limited, the Supreme Court of Canada confirmed that absent “absolutely clear and unambiguous” language in the employment agreement or the incentive plan restricting such entitlement, incentive compensation is considered part of the damages owed in lieu of common law reasonable notice.

Key Takeaways

Suppose employers want to restrict employee rights to incentive compensation. In that case, they must review and revise their employment agreements and incentive plans to ensure that the courts will uphold such an outcome. What has become apparent from a series of Ontario Court of Appeal cases and the SCC’s Matthews decision is that a court will strike down such a clause if there is any ambiguity. Language that might appear sufficient (i.e., requiring “full-time” or “active“ employment) is not enough to limit an employee’s post-termination entitlement to incentive compensation because the law deems employees to be employed during the reasonable notice period.

Background

David Matthews worked as a food scientist and senior executive for Ocean Nutrition Canada Limited and its predecessor companies starting in 1997. As a member of the senior management team, Mr. Matthews participated in Ocean Nutrition’s Long Term Incentive Plan (“LTIP”) under which he was entitled to a sizeable payment in the event of a sale of the company (“Realization Event”).

In 2011, Mr. Matthews resigned from his employment. Approximately one year later, Royal DSM N.V. acquired Ocean Nutrition for $540 million, triggering a payment under the LTIP. Mr. Matthews did not receive a payment due to exclusionary language in the LTIP, which required participants to be “full-time” and “active“ employees on the date of a Realization Event to receive a payment.

Following the sale, Mr. Matthews sued Ocean Nutrition for wrongful dismissal alleging that the Chief Operating Officer had constructively dismissed him by reducing his job responsibilities and lying about his status and future with the company. Mr. Matthews argued that he was entitled to a reasonable notice period of 15 months and payment under the LTIP.

Lower Court Decisions

At trial, the Court held that Mr. Matthews had been constructively dismissed and awarded 15 months notice of termination and approximately $1.1 million in damages for loss of the LTIP payment. The trial judge held that the LTIP did not clearly limit Mr. Matthews’ entitlements post-termination, and had Mr. Matthews remained with Ocean Nutrition during the notice period, he would have been employed when the company was sold, and the LTIP payment was triggered.

On appeal, the majority of the Nova Scotia Court of Appeal agreed that Mr. Matthews had been constructively dismissed and upheld the notice period, but overturned the finding that he was entitled to damages for loss of payment under the LTIP. Relying on an exclusionary clause, the majority held that the language in the LTIP was clear that Mr. Matthews would not be entitled to the LTIP payment after his employment ended, regardless of the reason. But the dissenting justice would have awarded Mr. Matthews the LTIP because of the employer’s bad faith conduct. He would not have awarded Mr. Matthews the LTIP because of the limiting language in the LTIP.

Supreme Court’s Decision

The Supreme Court of Canada overturned the Court of Appeal’s decision. It held that the LTIP language did not clearly and unambiguously oust Mr. Matthews’ right to the incentive payment. It refused to entertain Mr. Matthews’ bad faith claim because that issue was unnecessary to determine the issue of Mr. Matthews’ entitlement to LTIP. The SCC also clarified that employees should bring bad faith claims as part of the doctrine established by the SCC in its cases of Wallace and Keays.

When determining an employee’s right to bonus or benefit payments during the reasonable notice period, the SCC reiterated that courts must consider the following:

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

For the purposes of calculating wrongful dismissal damages, the SCC confirmed that the employment contract is not treated as “terminated“ until after the reasonable notice period expires. Since an employee effectively remains employed with the company during the reasonable notice period, exclusionary language such as “full-time“, “active”, or “actively employed” is not sufficient to limit an employee’s entitlement to incentive compensation during the notice period. The SCC also noted that reference to “termination without cause” does not cover “termination without notice.”

In applying this framework, the SCC held that if Mr. Matthews had been given proper notice of termination, he would have remained a full-time employee on the date of the sale of the company, and would have received a payment under the LTIP. The majority also held that Mr. Matthews was entitled to damages related to the LTIP payment, as the exclusionary language requiring an employee to be “full-time” or “active” at the time of the sale was not sufficiently clear to remove Mr. Matthews’ common law right to damages.