Written by Jordan Fremont, Carl Cunningham, John Gilmore and Dave Bushuev
The Supreme Court of Canada's decision in Matthews v Ocean Nutrition Canada Ltd., 2020 SCC 26, highlights the high standard a court will require to rebut the presumption at common law that a dismissed employee will receive all forms of compensation during the employee's notice period.
The appellant, David Matthews, had been constructively dismissed from his employment with Ocean Nutrition Canada Ltd. (ONC), but despite plain and direct language in ONC's long term incentive plan (LTIP), designed to eliminate any LTIP entitlement in respect of a participant who ceased to be an employee (e.g., regardless of whether the employee resigned or was terminated, with or without cause), the Supreme Court held that this did not "unambiguously take away" Matthews' entitlement. The Supreme Court reasoned that, in order to remove an employee's entitlements to incentive, bonus or other amounts during the reasonable notice period, the language of the agreement or plan must be absolutely clear and unambiguous, and language requiring an employee to be full-time, or active, or references cessation of employment due to termination “with or without cause” without expressly rebutting their entitlement during a common law notice period will not suffice to remove an employee’s common law right to damages. The result was that Matthews was awarded damages in excess of $1,000,000 for his entitlement under the LTIP.
Matthews worked for ONC for approximately fourteen-and-a-half (14.5) years, commencing in 1997. Through his tenure, Matthews held several senior management positions, and participated in the company's LTIP, which provided for the possibility of significant payouts to a limited number of ONC executives in the event of a sale of the company (referred to in the LTIP as a "realization event").
For many years Matthews was highly valued for his contributions to ONC, but that standing took a turn for the worse commencing in 2007, when a new Chief Operating Officer embarked on a campaign to marginalize him. Matthews’ position with ONC was eventually placed under review, and the Chief Operating Officer subsequently informed the Board of Directors that there would soon be no place in the company for Matthews. Matthews was frustrated when he was informed of these developments, as he was already suspicious that ONC was conducting due diligence for a possible sale, a process in which he would normally have had a role but from which he found himself excluded. In the summer of 2011, Matthews resigned from ONC and secured alternative employment with another company in a similar industry. About thirteen (13) months later, ONC was sold for $540 million.
The sale of ONC constituted a realization event for purposes of the LTIP, resulting in payments to qualifying participants. However, ONC took the position that Matthews was not a qualifying participant because he was not in active employment with the company at the relevant time. That position was premised on the following provisions of the LTIP:
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.
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.
Matthews subsequently brought a claim against ONC for constructive dismissal, seeking (amongst other things) damages in respect of the amounts he would have been paid under the LTIP. Matthews further claimed punitive damages, alleging that ONC behaved in a manner that was “oppressive of, unfairly prejudicial to and unfairly in disregard” of his interests, and, separately, that the constructive dismissal was carried out in bad faith at law and in breach of the corporation’s duty of good faith. Additionally, he sought compensation pursuant to an oppression remedy under s. 241(1) of the Canada Business Corporation Act.
Trial and Appeal Court Decisions
At trial, the Nova Scotia Supreme Court determined that Matthews was constructively dismissed because his responsibilities had been unilaterally and substantially reduced without reasonable notice and without alternative work that was substantially similar in terms of duties, responsibility and status. He was awarded damages based on fifteen (15) months' reasonable notice, including damages in respect of the LTIP on the basis that the plan's terms did not unambiguously limit Matthews' common-law entitlement to payment that would have been engaged had he been lawfully terminated with that length of notice.
The trial judge declined to award punitive damages on the basis that he was not persuaded that ONC's actions were intended to deprive Matthews of his LTIP entitlements, and (given the award respecting the LTIP) the trial judge wrote that it was unnecessary to determine whether Matthews was entitled to compensation pursuant to the oppression remedy.
ONC appealed this decision to the Nova Scotia Court of Appeal, which in a 2-1 majority decision upheld the trial judge's ruling that Matthews was constructively dismissed, and entitled to fifteen (15) months' reasonable notice, but overturned the award respecting the LTIP, finding that Section 2.03 of the LTIP had clear language to exclude any entitlements under the LTIP during the common law notice period for employees who resigned or were terminated without cause. The Nova Scotia Court of Appeal further commented that, given the trial judge's finding that ONC did not act in bad faith, there was no basis to award punitive damages, but that such damages could have been available had the trial judge determined that ONC had orchestrated Matthews' termination to avoid liability under the LTIP.
Supreme Court Decision
The Supreme Court set aside the judgment of the Nova Scotia Court of Appeal and found that section 2.03 of the LTIP did not unambiguously limit or remove Matthews' common law rights during the reasonable notice period. In doing so, the Supreme Court clarified the test for determining damages for breach of the implied term to provide reasonable notice, indicating that courts should ask the following two questions:
- Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?
- If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
On the first step of this test, it was uncontested that Matthews was constructively dismissed, that the reasonable notice period was appropriately 15 months, and that a realization event (i.e., sale) under the LTIP occurred during the 15-month notice period. As a result, the Supreme Court concluded that Matthews had a prima facie entitlement to be paid his entitlements under the LTIP.
On the second step of the test, the Court held that language requiring an employee to be 'full-time' or 'active', or that purports to remove an employee's common law rights to damages upon termination "with or without cause" will not alone be sufficient. Specifically, on the facts of the case, given that Matthews suffered an unlawful termination, the reference to "termination without cause" in section 2.03 of the LTIP did not imply termination without notice. In this regard, the Supreme Court stated:
… 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.
Accordingly, the Supreme Court found that section 2.03 of the LTIP did not unambiguously limit Matthews' common law rights during the reasonable notice period.
On the issue of good faith, the Supreme Court noted that the trial judge had made it abundantly clear that the treatment experienced by Matthews from 2007 until the moment of his departure constituted dishonest conduct on the part of ONC, but that the trial judge did not explicitly find a breach of contract resulting from this dishonesty. As a general concept, the Supreme Court affirmed that a contractual breach of good faith rests on a wholly distinct basis from that relating to the failure to provide reasonable notice.
However, while the Supreme Court commented on the concepts of a duty of good faith in the manner of dismissal and the extension of that duty during the life of the employment contract, the Supreme Court declined to make specific findings given the absence of an appropriate factual record and that the relief in the appeal was focused on the LTIP.
Practical Takeaway for Employers
The Supreme Court's decision in Ocean Nutrition reinforces several evolving themes in employment law, and establishes some ground-rules and guidelines for employers respecting limiting terms and conditions within employment agreements or plans or policies respecting incentive and/or other entitlements. In particular:
- Clear and Unambiguous Language - Employment terms and conditions which limit an employee's entitlements need to be drafted very carefully and in an unambiguous way. Seemingly plain and direct language that entitlements do not continue following cessation of employment, regardless of whether due to resignation or termination, with or without cause may not be sufficient. More precise language addressing rights at common law will be needed.
- Draft to ensure terms are brought to employee's attention and are compliant with Employment Standards - The Supreme Court did not address these issues based on the facts in the Ocean Nutrition case, but the fact the Supreme Court mentioned that plan terms will need to be drafted in a way that adequately addresses applicable employment standards requirements (i.e., on termination) and, in certain situations, may need to be expressly drawn to the attention of impacted employees should be considered when drafting and communicating plan provisions. This is consistent with other recent decisions. For further background on this topic see our blog regarding terms and conditions that are considered "harsh and oppressive" and therefore unenforceable, despite plain language.
Additionally, it should be pointed out that the Supreme Court has reiterated that a course of conduct having improper purposes, whether during the course of employment or at the point of termination, can give rise to a breach of the duty of good faith and result in damages. These are damages in addition to damages for failure to give notice of termination and include potential damages for mental distress or punitive damages. To mitigate against such claims, employers should follow the "golden rule" and ensure that actions taken respecting employees are premised on proper purposes.