Oct 19, 2020

By Malcolm Boyle, QC & Alex Warshick

On October 9, 2020, the Supreme Court of Canada delivered its decision in Matthews v. Ocean Nutrition Canada Ltd. on whether a former employee is entitled to bonus payments or other benefits during their reasonable notice of termination period. Reconfirming the employment contract effectively “remains alive” for the purposes of assessing the employee’s damages, the Court awarded a former employee over $1M under a contractual bonus incentive plan, the triggering event for which occurred after his “active” employment ceased but during the period of reasonable notice the employer owed him following his termination, and despite extensive plan wording purporting to limit entitlement to active employees. The Court enunciated a two-part test to determine whether bonus eligibility continued post-termination and provided guidance to employers on dealing in good faith with their employees. In doing so, the Court clarified three key bases for employer liability to employees for damages and offered a glimpse of what the future of employers’ liability exposure to employees might hold.

Here’s the question the Court considered, the two-part test it enunciated to answer it, and six actions employers can take to mitigate their employee liability exposure.

The $1M Question

Starting in 1997, Mr. Matthews was a senior executive with the employer and a party to the employer’s long term incentive plan contract, intended to reward and retain certain senior employees. Under the plan, qualified employees were entitled to payments if certain triggering events, including the sale of the employer, occurred. The plan, however, included two clauses purporting to remove that entitlement if the employee were no longer a “full-time employee” when the triggering event occurred:

[The employer] shall have no obligation under this [plan] to the Employee unless on the date of a [triggering] event the Employee is a full-time employee of [the employer]. For greater certainty, this [plan] shall be of no force and effect if the employee ceases to be an employee of [the employer], 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 [triggering 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, the employer hired a new COO. Mr. Matthews claimed, and the court agreed, the new COO undertook a four year “campaign” to “marginalize” Mr. Matthews’ role in the company, limiting his responsibilities, excluding him from managerial decisions, and lying to him about his status in the company. Mr. Matthews believed his employer would soon be sold, and stayed because of his entitlement under the plan to a portion of the proceeds from the company’s sale. In 2011, though, he resigned. His employer was sold 13 months later for $540M. Under the plan, Mr. Matthews would have been entitled to more than $1M. The employer refused to pay Mr. Matthews because he wasn’t an “active employee” at the sale date. Mr. Matthews sued, arguing that his resignation had in fact been a constructive dismissal (his employer had acted as though it were no longer bound by the employment contract, forcing him out), that his employer had carried out that dismissal in bad faith, and breached its duty of good faith in refusing to provide notice of termination and pay him under the plan.

The 2-Part Test

The N.S. Supreme Court decided the employer’s actions amounted to constructive dismissal of Mr. Matthews and awarded him 15 months’ common law reasonable notice, and his damages (monetary compensation for his losses) included what he would have received under the plan, had his employer given him proper notice of termination, because the triggering event occurred during this 15-month period. The employer appealed. The N.S. Court of Appeal agreed the employer constructively dismissed Mr. Matthews and 15 months was the appropriate notice period – but decided he was not entitled to the plan payment. Mr. Matthews appealed to the Supreme Court of Canada on the sole question of whether he was entitled to the plan payment. The Court set out a two-part test to determine whether a dismissed employee’s damages for the employer’s breach of the duty to give common law reasonable notice included bonus payments or certain other benefits:

“But For”. But for the termination, would the employee have been entitled to receive the bonus or benefit? Yes, but this was not an issue at the Supreme Court of Canada because neither party appealed both N.S. lower courts’ decision on the constructive dismissal or the reasonable notice period and entitlement to the payment under the plan arose during the notice period the court awarded.

Exclusion. Does the wording of the bonus or benefit plan or employment agreement unambiguously alter the employee’s common law right to damages for breach of the duty to provide reasonable notice? No. Courts will “strictly construe” clauses that exclude or limit the employee’s rights where the contract is “unilateral” (not negotiated between the parties), even if not necessarily a “standard form” contract (only a “limited number” of employees were parties to the plan). None of the wording used was enough to displace Mr. Matthews’ entitlement to damages:

  • “Full-time” or “active” employee. Matthews would have been “full-time” or “active” during the notice period if the employer hadn’t breached its duty to give reasonable notice. For the purposes of calculating common law damages for this breach, the employment contract notionally “remains alive” and damages are based on the employee’s total compensation - including any bonuses they would have earned during the notice period.

  • “With or without cause”. The exclusion clause must cover the exact circumstances that happened. Termination without cause doesn’t imply termination without notice. This was a termination without notice or an “unlawful termination” - which also wouldn’t have been enough even if it were in the plan. To calculate damages, the contract isn’t treated as “terminated” until the end of the reasonable notice period.

  • “Severance”. Damages for breach of the duty to give reasonable notice and “severance pay” are distinct legal concepts.

The 6 Employer Mitigation Actions

For years, Canadian courts have been blunt about their view that employees are vulnerable vis-à-vis employers, and they will protect employees’ rights. This paternalistic approach has informed the development of employment law jurisprudence generally; this decision is consistent with that approach. In Matthews v. Ocean Nutrition Canada Ltd., the Court recognized three separate and independent types of damages, explaining damages arising out of the same employment relationship or the termination of that relationship will be calculated differently depending on which of these three breaches the employee successfully claims – suggesting employers are exposed to liability on at least three separate fronts (though it did reconfirm there should be no double-recovery):

  • Damages for breach of the duty to provide reasonable notice.
  • Damages for bad faith in the manner of dismissal.
  • Damages for breach of the duty of good faith and honesty in the performance of a contract.

Here are six actions employers can take to mitigate their liability exposure to damages as a result of this decision:

Be Blunt. Review the wording of bonus, incentive, and other benefit plans and employment agreement termination provisions and revise them if necessary. The plan in this case used common words, thought to be sufficient to limit employees’ entitlement; Mr. Matthews’ own legal counsel described the language as, “as strong as he’s seen in such employment contracts”. Employers must go further about their intention that the employee not be entitled to partake in bonus or incentive plans post-termination or recover damages for bonus entitlements which would have been payable were the employee still employed, no matter what the circumstances and no matter what the purpose. We know now what words won’t suffice; we don’t know yet for sure what words will. But it’s clear that any exclusionary clause must contain an explicit and unambiguous waiver of the right to receive a bonus payment during any termination notice period; in short, the plan or contractual termination clause should spell out and limit damages on termination in advance, excluding or limiting entitlements to bonus, incentives or other payments. Adding a waiver of liability and of the right to sue for the bonus could also help enforce this exclusion or limitation. And while you’re at it:

  • Discretionary Plans. Look at the wording of any “discretionary” plans too. The Court stated that whether a bonus was an “integral part” of the employee’s compensation package for the purpose of calculating reasonable notice damages is only relevant if there’s doubt about whether they would have received it during the notice period, such as in the case of a “discretionary” bonus. However, it’s risky to rely solely on the discretionary nature of the bonus to disentitle an employee post-termination.

  • Just as with one-sided standard form agreements, consider ways to draw an employee’s attention to any exclusionary clauses in a bonus, incentive or benefits plan and how to evidence this attention. The Court signalled it might be appropriate in a future case to consider whether an employer adequately brought the clauses in a bonus plan contract that purport to limit or eliminate an employee’s common law right to damages to the employee’s attention. Ways include requiring the employee to initial the clause, bold it, underline it, and/or include a specific and separate clause acknowledging agreement to the term.

  • Employment Standards Laws. The Court also didn’t decide, but noted that, the question whether an exclusionary clause is consistent with minimum employment standards laws could arise. This could particularly be the case with statutory protections of rates of pay during notice periods. When reviewing the wording of any bonus, incentive or benefit plans, keep this question in mind too.

Be Certain. Or as certain as you can be. If your employment contracts don’t include a termination clause, consider reviewing and revising employment contracts to include one. The Court reconfirmed employers are entitled to terminate an employment contract at any time – but always subject to “common law reasonable notice”: the implied term, included in every employment contract, that the employer must provide the employee with reasonable notice upon termination (including a constructive dismissal) regardless of the presence or absence of good faith. However, it’s open to employers to displace common law reasonable notice with a contractual notice period by using a termination clause in an employment contract. This is appealing for many reasons, including giving the employer and the employee a degree of certainty: common law “reasonable notice” is notoriously uncertain to calculate. But this is a difficult task: similar to the interpretation of exclusionary clauses in bonus plans, courts closely scrutinize termination clauses, and any termination clause purporting to remove an employee’s right to common law reasonable notice must use clear, unambiguous language expressly specifying some other period of notice and complying with employment standards legislation. Following the Court’s decision in this case, these termination provisions should also exclude or limit the recovery of bonus payments or other incentives, as applicable, as part of the employee’s damages during the period of reasonable notice.

Be Careful. When contemplating changes to an employment contract or a bonus, incentive or benefit plan, or to an employment contract, however, be careful with existing employees. Implementing changes to these contracts vis-à-vis employees you hire in the future is easy. But implementing them vis-à-vis existing employees isn’t: unilaterally changing a fundamental term or condition of employment without providing the employee with “consideration” (something of new value in exchange) or sufficient advance notice is constructive dismissal. Practically, however, changing a bonus or employment contract can also create a business quandary for employers. For example, employers use bonus, incentive and benefit plans, including stock option plans or other equity compensation plans, to attract desirable employees to the business, and to keep them there, so the terms have to be attractive. Employers will need to balance risk mitigation with these business realities.

Be Honest. Be honest with employees throughout the employment relationship or you might have to pay – even if you don’t breach the duty to provide reasonable notice, and even if the conduct doesn’t amount to constructive dismissal. The Court confirmed the duty of honest and good faith performance of a contract (as it articulated in Bhasin v. Hrynew) also applies to employment contracts, separate and independent from the duty to give employees reasonable notice of termination, but declined to detail the contours of the damages that might arise from a breach of this duty in the employment context further. However, employers and senior managers must take extreme care in making promises or representations to an employee; untrue or bad faith promises or representations could result in claims for damages for bad faith conduct, independent of damages for reasonable notice. For example:

  • False representations that an employee will be “looked after” come profit-share or bonus allocation time, particularly if used as an inducement to retain an employee, could be a breach of this duty.

  • Similarly, continued promises or representations, even if vague, about an employee’s potential for promotion or advancement, when no such opportunity exists or is likely to exist, might also constitute bad faith dealing such that damages could arise—particularly if the employee has remained in the company’s service on the basis of these representations.

  • Other promises or representations about changes in responsibility or compensation, benefits or reimbursements, or the future of the employer, could all constitute compensable breaches of an employer’s duty to act in good faith and with honesty toward their employees.

While the scope of this duty in the employment context is still undefined, the Court appears ready to hear a case in which an employer’s bad faith conduct falling short of constructive dismissal could warrant damages. This begs the question: if, in this case, the triggering event for payment occurred after the end of the reasonable notice period, would Mr. Matthews still have been entitled to the plan payment, or to some other measure, as damages for breach of the duty of honest and good faith performance of a contract? This question could come up in any number of cases in which there’s no enforceable contractual exclusion clause, and the payment entitlement arises at a date beyond the reasonable notice period, for example stock option plans or other long-term compensation plans.

Be Nice. Or at least don’t be nasty – ever: it could catch up with you at the end of the employment relationship, even years later. The Court reconfirmed the duty to exercise good faith in the manner of dismissal (which it first articulated in Wallace v. United Grain Growers Ltd.) is also separate and independent from the duty to give employees reasonable notice of termination, and thus could also form a separate basis for damages. And although it acknowledged this issue wasn’t before the Court, the Court appeared willing to look back – way back - over the four year “campaign” during which the employer undermined Mr. Matthews, confirming the analysis of “bad faith in the manner of dismissal” can include a review of a pattern of behaviour that culminated in the constructive dismissal, over a long period of time, and not just the “tipping point” for the dismissal. So in addition to the more traditional examples of bad faith in the manner of dismissal, such as inappropriate refusal to provide a reference or conduct harming the employee’s reputation or causing embarrassment, repeated instances of bad behaviour, such as harassment or bullying, undermining, or ostracizing, even over many years, that culminates in constructive dismissal might be compensable by damages (aggravated and/or punitive) over and above, and separate from, damages for breach of the duty to provide reasonable notice.

Be Fair. As it has in many decisions, the Court put considerable emphasis on the importance of work to a person’s self-worth and identity. Employers trying to tie bonuses, options, or retirement allowances to post-employment non-competition terms will want to keep this in mind. Courts could find an offer to pay an employee to give up their profession, a source of self-worth and identity, even for a limited time, to be in bad faith or to be an unconscionable bargain, particularly where there was unequal bargaining power between employer and employee and/or the terms of the offer were not negotiated, as in the context of one-sided standard form contract terms in Uber Technologies Inc. v. Heller.

Please contact your McInnes Cooper lawyer or any member of the Labour & Employment Law Team @ McInnes Cooper to discuss this topic or any other legal issue.

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