Constructively Dismissed Employee Entitled to Over $1 Million for Incentive Plan Payment
October 2020 - 3 min read
Have you reviewed the wording of your long-term incentive or other bonus or benefit plans for employees recently? If not, this is something employers will want to consider after the release of the Supreme Court of Canada’s decision in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 ("Matthews").
In its decision, the Court ruled Matthews was entitled to compensation for a long-term incentive plan (“LTIP”) benefit he would have earned had he not been constructively dismissed without notice. The Court determined that, had Matthews been given reasonable notice of termination (the trial judge determined 15 months was the reasonable notice period), he would have been a full-time employee when the sale of the company, which was a “realization event” under the LTIP, occurred. As a result, the Court ordered Ocean Nutrition to pay Matthews over $1 million in damages for loss of the LTIP payment (plus interest and costs).
The Supreme Court of Canada stated that, in determining if a constructively or wrongfully dismissed employee is entitled to a bonus or benefit payment, there are two questions to be asked:
- Would the employee have been entitled to the bonus or benefit payment as part of his or her compensation during the reasonable notice period?
- If so, do the terms of the bonus or benefit plan or contract unambiguously limit or remove the employee’s common law right to the bonus or benefit payment?
In answering the first question, the SCC noted that the purpose of damages awarded in lieu of reasonable notice is to put the employee in the position he or she would have been in if still working through the notice period. In this case, if Matthews had worked the 15-month notice period, there was no question he would have received the LTIP payment.
The SCC then turned its attention to the second question and reviewed the clauses in the LTIP that purported to limit the entitlement of a person who was not an employee when the “realization event” occurred. The clauses read:
2.03 CONDITIONS PRECEDENT
ONC shall have no obligations 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 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.
The Long Term Value Creation Bonus Plan does not have any current or future value other than on the date of a 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.
The Court agreed with the trial judge that this wording was not sufficient to unambiguously limit or remove Matthews’ common law right to damages. The language requiring the person to be a “full-time employee” was not sufficient, since if Matthews had been given proper reasonable notice he would have been a full-time employee throughout the reasonable notice period.
The phrase “terminated with or without cause” also failed to save Ocean Nutrition in this case as exclusion clauses “must clearly cover the exact circumstances which have arisen”1. The SCC held that “termination without cause” does not imply “termination without notice” (i.e. wrongful or constructive dismissal) because, at law, the employment agreement is not treated as “terminated” until after the reasonable notice period expires.
Takeaway for Employers
Many bonus and benefit plans include language requiring an employee to be “actively employed” or “employed full-time”, or something along those lines, at the time the bonus or benefit is paid or a triggering event occurs to be eligible for the bonus. Based on the SCC’s decision in Matthews, such language is not likely sufficient to prevent the employee from entitlement to the bonus or benefit if it would have been paid during their reasonable notice period. Accordingly, employers should review the language in their bonus or benefit plans and amend where needed.
Field Law is well equipped to assist employers with review and amendment of their bonus or benefit plans to provide better protection in situations where employees are constructively or wrongfully dismissed. Please contact a member of our Labour + Employment Group if you require assistance.
1 Matthews at paragraph 61.