SCC Update – Payment of Incentive Bonuses During the Notice Period

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  • October 14, 2020

SCC Update – Payment of Incentive Bonuses During the Notice Period

On Friday, October 9, 2020 the Supreme Court of Canada released its decision on Matthews v Ocean Nutrition Canada Ltd.[1]  This decision was highly anticipated for its commentary on long-term incentive plan entitlements.

Case Summary

The appellant, David Matthews (“Matthews”) was employed by the respondent Ocean Nutrition Canada (“ONC”).  As part of his employment, Matthews was part of ONC’s Long-Term Incentive Plan (“LTIP”).  Under the LTIP, a sale of the business would trigger payments to eligible employees.  The LTIP limited eligibility for these payments 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.

In 2007, ONC hired a new Chief Operating Officer.  Shortly after this change in management, ONC began what the trial judge described as a “campaign to push Matthews’ out of operations and minimize his influence at ONC.”[2]  As a result, Matthews accepted a position with a new employer.  Approximately 13-months later, ONC was sold.  Matthews filed a claim for constructive dismissal, seeking, in part, payment under the LTIP.

The trial judge concluded that ONC had constructively dismissed Matthews, and that the reasonable notice period was 15-months. On the LTIP issue, the judge found that because the language in the LTIP did not unambiguously limit or remove Matthews’ common law right to damages, he was entitled to damages equivalent to what he would have received under the LTIP.

The Court of Appeal overturned the trial judge in 2:1 decision.[3]  The majority found that the LTIP contained “very clear and unambiguous” language and that once his employment terminated, for whatever reason, Matthews’ right to recover under the LTIP ceased.[4]

The Supreme Court began by reiterating the principle that, as a result of his constructive dismissal, Matthews was entitled to damages representing compensation for the income, benefits and bonuses he would have received had ONC not breached the implied term to provide him with reasonable notice.[5]   The Court then confirmed that the analysis as to whether these damages ought to include bonus payments, such as the LTIP, involves two questions:

  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?[6]

Applying this analysis, the Supreme Court found that but for Matthews’ dismissal, he would have received the LTIP payment during the 15-month reasonable notice period. Furthermore, the Court found that the wording of the LTIP did not unambiguously limit or remove Matthews’ entitlement to common law damages.  Therefore, Matthews was entitled to damages equivalent to what he would have received pursuant to the LTIP.

The Supreme Court also briefly addressed the issue of good faith. It confirmed that an employer’s duty of good faith is not limited only to the time of termination of employment, but left open the question of whether the employer is bound by this duty “during the life of the employment contract.”[7]

What Matthews means for Employers

This decision reinforces the requirement for very clear, unambiguous language in order to limit an employee’s entitlement to bonuses during the reasonable notice period following the termination of their employment.   Employers would benefit from carefully reviewing their existing agreements and incentive plans to ensure they are not exposed to unexpected liability as a result of the Supreme Court’s decision in Matthews.

[1] 2020 SCC 26 (the “SCC Decision”)

[2] Matthews v Ocean Nutrition Canada Ltd, 2017 NSSC 16 at para. 296 (the “Trial Decision”)

[3] Mathews v Ocean Nutrition Canada Ltd, 2018 NSCA 44 (the “Appeal Decision”)

[4] Appeal Decision at para. 88.

[5] SCC Decision at para. 53.

[6] SCC Decision at para. 55

[7] Para 85 and 86