Should bonuses be paid during an employee's notice period?

HRD spoke to Michelle McKinnon, associate at law firm Harris & Company, on a recent, potentially ground-breaking, Supreme Court ruling.

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The Supreme Court of Canada (SCC) has published an important reminder to employers about damages owed during the period of reasonable notice. In Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, the SCC discussed when a bonus (or similar benefit) is included in the damages an employee can claim during the period of reasonable notice.

The Facts and Legal Issues
The case involved an employee who was constructively dismissed. Mr. Matthews claimed damages for Ocean’s failure to provide reasonable notice. The parties disagreed whether Mr. Matthews was entitled to a bonus that became payable during the period of reasonable notice.

The SCC held that the answer to this question requires a two-step analysis:

1. First, consider the employee’s common law rights and examine whether, but for the termination, the employee would have been entitled to the bonus (or other benefit) as part of their compensation during the reasonable notice period.
2. Second, if the employee is entitled to the bonus (or other benefit), consider whether the terms of the employment contract or bonus plan unambiguously takes away or limits the employee’s common law right.

On the first question, the SCC held that Mr. Matthews would have been entitled to receive the bonus during the common law reasonable notice period. In other words, had he not been constructively dismissed, he would have received the bonus. The incentive plan in question provided for the payment of a bonus on the sale of the company, which in fact occurred during Mr. Matthews’ reasonable notice period.

On the second question the SCC held that the terms of the incentive plan did not unequivocally remove or limit Mr. Matthews’ common law right to receive the bonus as part of the damages he was entitled to for failure to give reasonable notice. The language of the benefit plan included wording typically found in incentive and similar benefit plans:

• Mr. Matthews had to be a full-time employee on the date of the sale of the company to be entitled to the bonus.
• The ‘agreement’ would be of no force or effect if Mr. Matthews ceased to be an employee of Ocean, regardless of whether Mr. Matthews resigned or was terminated, with or without cause.
• The bonus would not be calculated as part of Mr. Matthews’ compensation, including amounts due on termination and any severance payment.

The SCC concluded that the above terms were not sufficient to remove or limit Mr. Matthews’ common law rights. In other words, had reasonable notice been given, Mr. Matthews would have been in ‘full time’ and ‘active’ employment until the end of the reasonable notice period. Since the bonus became payable during the notice period, Mr. Matthews was entitled to receive it, unless the language of the bonus plan clearly and unambiguously removed his right to receive it (which it did not).

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The Take-Away for Employers 

If employers wish to exclude incentive, options or bonuses from the reasonable notice period, they should review the wording of their plans to ensure the language clearly and unambiguously removes an employee’s common law right to claim the benefit as part of their damages for failure to give reasonable notice.

The SCC also confirmed employment contracts do not contain an implied term of payment in lieu of notice. Thus, to avoid breaching an employment contract an employer is required to provide reasonable notice.  Failure to do so will result in the employee being able to claim damages for all amounts the employee would have been entitled to during the reasonable notice period.