Supreme Court Clarifies Requirements to Limit Bonus Entitlement upon Termination

In a recent decision from the Supreme Court of Canada, Matthews v. Ocean Nutrition Canada Ltd., the Court clarified the applicable test for limiting an employee’s bonus on their termination.

The trial judge concluded that Ocean Nutrition had constructively dismissed Matthews, and that Matthews was entitled to pay in lieu of notice of a 15-month notice period. He was also awarded damages equivalent to what he would have received under Ocean Nutrition’s long-term incentive plan (LTIP), which provided for a substantial payment upon the sale of the company. The company was sold 13 months after the Plaintiff’s termination, within the notice period. The trial judge concluded that the Plaintiff would have received this payment and that the LTIP did not unambiguously limit or remove his common law right to damages, and awarded damages of $1,086,893, equivalent to what he would have received had he been employed at the time to the termination.

The Nova Scotia Court of Appeal affirmed that he was constructively dismissed and agreed with the 15-month notice award, but held that the Plaintiff was not entitled to damages related to the LTIP. The Court of Appeal relied on the qualification language contained in the LTIP, and in particular, that his entitlements under the LTIP ceased at the moment he left Ocean Nutrition, concluding that the disentitling language in the LTIP was plain and unambiguous.

At the Supreme Court, the Court reviewed the terms of the LTIP. The Supreme Court, noted that because of the wording of the plan, and the fact that he was entitled to reasonable notice of 15 months, there was no question about whether he was entitled to the bonus or not. The question was whether or not the language found in the LTIP was sufficient to unambiguously limit or remove the employee’s common law rights. The terms of the plan considered were 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 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.

2.05 GENERAL:

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 Supreme Court noted that in order to remove an employee’s common law right to damages as a result of his constructive dismissal, the language has to be very specific. At paragraph 66, the Court stated:

…where a clause purports to remove an employee’s common law right to damages upon termination “with or without cause”, such as clause 2.03, this language will not suffice. Here, Mr. Matthews suffered an unlawful termination since he was constructively dismissed without notice. As this Court held in Bauer v. Bank of Montreal, [1980] 2 S.C.R. 102, at p. 108, exclusion clauses “must clearly cover the exact circumstances which have arisen”. So, in Mr. Matthews’ case, the trial judge properly recognized that “[t]ermination without cause does not imply termination without notice” (para. 399; see also Veer v. Dover Corp. (Canada) Ltd. (1999), 120 O.A.C. 394, at para. 14; Lin, at para. 91). Yet, it bears repeating that, for the purpose of calculating wrongful dismissal damages, the employment contract is not treated as “terminated” until after the reasonable notice period expires. So, even if the clause had expressly referred to an unlawful termination, in my view, this too would not unambiguously alter the employee’s common law entitlement.

For the purpose of calculating damages, the Supreme Court reiterated that the contract is not terminated until the end of the notice period expires. In this case, and despite eligibility language in section 2.03 which required the employee to be a “full-time employee”, this  language was not specific enough to clearly and unambiguously deny the Plaintiff a common law entitlement to damages for the LTIP arising from an unlawful termination.

In addition, the Supreme Court stated that clause 2.05 did not have the effect of limiting the entitlements of the employee either. The clause refers to “severance calculation” but this language was not specific enough to remove entitlement for the LTIP payment. For example, severance pay and damages arising from the LTIP are distinct legal concepts and significantly greater precision was required to restrict common law damages including specific language restricting LTIP payments during a reasonable notice period.

Therefore, employers should carefully review existing bonus plans or LTIP plans which provide for active employment as a precondition for entitlement or clause that purport to limit entitlements beyond the last day of employment. While the Supreme Court has certainly left the door open for employers to implement contract clauses which limit an employee’s entitlements to bonus payments during a reasonable notice period, that language must be very clear, specific and unambiguous.