The Supreme Court's long-awaited decision in Matthews v Ocean Nutrition Canada Ltd, 2020 SCC 26 was released late last week.
In a unanimous decision, the Supreme Court confirmed that when an employer terminates an employee's job, even constructively, the employee is entitled to all aspects of their compensation throughout the reasonable notice period, absent clear and unambiguous language contract language to the contrary. The Supreme Court also confirmed that the compensation owed includes all major elements of the employee's compensation, and not just the items he received on a regular or annual basis.
David Matthews was an experienced, well-respected chemist who had occupied several senior management positions over his years with his employer, the Defendant Ocean Nutrition. As a senior executive, he received a portion of his income through his membership in the company's Long-term Incentive Program (LTIP). Under the terms of LTIP plan, certain triggering events, such as the sale of the company, would entitle Mr. Matthews to a significant payout.
After Ocean hired a new COO in 2007, the COO personally commenced a campaign of abuse that lasted several years with the clear intent to marginalize Mr. Matthews' role at the company. Mr. Matthews' job description changed multiple times, his responsibilities were reduced, and there were significant changes to his reporting structure. The court also found evidence that that COO had lied to other employees about Mr. Matthews' performance, spreading negative rumours about him.
After enduring this treatment for several years, Mr. Matthews finally resigned from his employment in June 2011.
This is where the claim gets very interesting: thirteen months later, Ocean was purchased by a competitor company. This constituted a triggering event under the terms of Ocean's LTIP plan, and plan members became entitled to significant payouts. Had Mr. Matthews been an employee at the time of the sale, he would have received nearly $1.1 million. This is what Mr. Matthews had worked for but could not wait to obtain while being treated badly.
Mr. Matthews sued Ocean for wrongful dismissal damages, alleging that he had been constructively dismissed in June 2011. He claimed a minimum notice period of 14 months, which included the $1.1 million payout he would have received in July 2012.
Unsurprisingly, the Defendant company took the position that Mr. Matthews was not entitled to the payment, as the terms of the plan required active employment at the time of the triggering event. The terms were as following (emphasis added):
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 or 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 the 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.
This kind of plan language is very, very common. Employers across Canada tell their employees all the time that they have to be "employed" with the company to get bonuses, shares, share units, options, and other forms of compensation.
The Lower Courts' Decisions
The trial judge found that Mr. Matthews had been constructively dismissed and awarded him damages based on a 15-month notice period. He concluded that the $1.1 million LTIP payout formed part of these damages, as the triggering event had occurred during the notice period.
The Nova Scotia Court of Appeal upheld the trial judge's conclusion that Mr. Matthews had been constructively dismissed and agreed that a 15-month notice period was appropriate. However, in a 2-1 majority decision, it concluded that Mr. Matthews was not entitled to the $1.1 million payout due to the language in the LTIP plan which required employees to be active employees at the time of the triggering event.
Mr. Matthews appealed to the Supreme Court of Canada.
The Supreme Court's Decision
The Supreme Court restored the trial judge's decision and awarded Mr. Matthews reasonable notice damages based on a 15-month notice period. The Court concluded that, as the sale had occurred during the notice period, Mr. Matthews was also entitled to a payout under the terms of the LTIP plan.
In coming to this conclusion, Justice Kasirer, writing for the unanimous court, expressly endorsed the following two-step test from Paquette v TeraGo Networks Inc, 2016 ONCA 618
- Was the bonus an integral part of the employee's compensation package, triggering a common law entitlement to damages in lieu of bonus?; and,
- If so, is there any language in the bonus plan that would restrict the employee's common law entitlement to damages in lieu of a bonus over the notice period?
Although the LTIP payment at issue was not a regular part of Mr. Matthews' compensation, this did not mean that it was not an integral part of his compensation. It was integral here in the sense that Mr. Matthews had a plan that told him he would get the LTIP payment. The Court concluded he passed the first step of the Paquette test.
Turning to the second branch of the test, the Court determined that the language in the LTIP plan did not clearly and unambiguously oust Mr. Matthews' common law right to the payment. Accordingly, the second step of the Paquette test was also met.
Although Mr. Matthews also argued that he was also entitled to bad faith damages, the SCC quickly disposed of this argument because, to award additional damages based on the breach of the underlying principle of good faith would be "double-dipping" so to speak—the same damages, twice over.
This decision confirms the application of the Paquette test, a test applied many times in Ontario. The decision is significant in its reiteration that, absent clear and unambiguous language to the contrary, employees are entitled to all elements of their compensation during the notice period.
Matthews is very helpful for the many employees who have these bonus, STIP, LTIP, and other compensation plans because the language in the Ocean Nutrition plan was very strongly telling employees that "you don't get an LTIP if you are not here". Ocean's LTIP language expressly stated that LTIP payments "shall not be calculated as part of the Employee’s…severance calculation." It added that it would be of no force and effect following a resignation or termination. Even still, this was not enough to oust the common law requirement for reasonable notice, according to the Supreme Court.
Put simply, if that language won't "do the trick", it is hard to imagine language that will. Many employees can use this decision and apply it to their plans and say to their employers, "sorry, you cannot terminate me and use your unilateral decision to deny me the things I have worked hard for this year or for many years".
Tidbits for the Future
Of some interest, the Court commented that, in certain cases, it would be appropriate to consider whether clauses that limit an employee's common law rights were adequately brought to the employee's attention. Lower courts have taken some leadership in this area, requiring employers to actually draw an employee's attention to limiting language in plans and contracts. The Court's suggestion that it might be appropriate to look at whether an employer drew an employee's attention to a problematic provision would, if adopted more widely, represent a larger shift in employment law that would require consideration of the employee's understanding and knowledge of any terms that significantly restricted their common law rights. This would be a welcome shift, because few employees understand their rights and can be in for a shock when terminated and told that they are owed very little. We anxiously await to see how these brief but important comments will be treated by the lower courts.