THE EMPLOYERS' EDGE
Supreme Court of Canada Clarifies Damages Award for Loss of Incentive Plan Payout: Matthews v Ocean Nutrition Ltd
The Supreme Court of Canada (“SCC”) released an important decision in Matthews v. Ocean Nutrition Canada Limited, reiterating that employees are entitled to all of their contractual benefits and incentives during the common law reasonable notice period.
- Mr. Matthews (“Matthews”) commenced employment with the employer, Ocean Nutrition Canada Limited (“Ocean”) in 1997 and occupied several senior management positions throughout his approximately fourteen (14) year tenure;
- Matthews participated in Ocean’s Long Term Incentive Plan (“LTIP”) – a contractual arrangement designed to reward participating senior executives upon the sale of the company;
- a new COO was hired at Ocean in 2007 who began a “campaign” to marginalize Matthews in the company;
- the COO’s repeated incidents of dishonesty amounted to constructive dismissal which was not at issue in this decision;
- the notice period stemming from the constructive dismissal was assessed at fifteen (15) months, which was also not in dispute before the SCC;
- in June 2011, Matthews officially resigned from Ocean to take a position with a new employer;
- thirteen (13) months after Matthews’ departure, Ocean was sold for $540 million;
- the sale constituted a “Realization Event” for the purposes of the LTIP, thus triggering payments to employees who participated in the plan;
- had Matthews still been employed at the time of the sale, he would have been entitled to a payout of approximately $1.1M; and
- Ocean ultimately took the position that he did not satisfy the terms of the plan since Matthews was not actively employed on the date of the sale.
Whether Matthews still qualified for the LTIP payments despite the sale of Ocean occurring over one (1) year after his tenure with the company had concluded.
The payment of the LTIP would be included in Matthews’ wrongful dismissal damages because the sale of Ocean took place during his common law notice period.
Supreme Court of Canada’s Analysis
Common Law Reasonable Notice
The SCC clarified that when an employee sues for damages for constructive dismissal, they are claiming for damages as compensation for the income, benefits, and bonuses they would have received had the employer not breached the implied term to provide reasonable notice. This approach respects the well‑established understanding that the contract effectively remains alive for the purposes of assessing the employee’s damages.
Further, because Matthews was constructively dismissed without notice, he was entitled to damages representing the salary, including bonuses, he would have earned during the fifteen (15) month period. This is so because the remedy for a breach of the implied term to provide reasonable notice is an award of damages based on the period of notice which should have been given, with the damages representing “what the employee would have earned in this period”.
What Matthews would have earned in this period is fifteen (15) months of salary in addition to his share of the LTIP. Therefore, the SCC ordered Ocean to pay damages accordingly.
The LTIP Contractual Language
Ocean took the position that the terms of the LTIP limited or removed Matthews’ right to payment on the basis of the following provisions:
2.03 CONDITIONS PRECEDENT:
[Ocean] 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 [Ocean]. For greater certainty, this Agreement shall be of no force and effect if the employee ceases to be an employee of [Ocean], 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.
However, the SCC ruled that language requiring an employee to be “full-time” in clause 2.03, did not effectively remove an employee’s common law right to damages in a “clear and unambiguous” manner. After all, had Matthews been given proper notice, he would have been “full-time” or “actively employed” throughout the reasonable notice period.
Further, since the LTIP was a “unilateral contract”, it was strictly interpreted. The SCC ruled that the employment agreement did not unambiguously limit or remove Matthews’ common law right to receive damages as compensation for the lost bonus.
The SCC made it abundantly clear that if an employee would have been entitled to a bonus or benefit as part of their compensation during the reasonable notice period, the terms of the employment contract or bonus plan must unambiguously take away or limit that common law right. The SCC will take a very strict approach to determining ambiguity and resolve any doubt in favour of the employee.
This case demonstrates that employers should carefully consider all bonus structures in an employee’s contract when considering to terminate that employee. Properly worded employment contracts can avoid unnecessary and unintended bonus payouts to terminated employees.
Please contact one of our CCPartners team members who can assist with drafting appropriate employment agreements, enforceable termination clauses, and suitable bonus structure agreements.