Supreme Court of Canada overturns Court of Appeal in landmark bonus case

In 2007, a new Chief Operating Officer (COO) started assigning duties to Matthews. Later that same year, Matthews and ONC entered into a LTIP under which 2% of the company’s value created on the sale or public offering of the company in excess of $100 million (a “Realization Event”) would be distributed among the executives who were parties to the LTIP.  As Matthews was the longest-term executive subject to the LTIP, he would have received the highest payout on a Realization Event.  

The LTIP provided at section 2.03:

ONC shall have no obligation under the 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. 

Section 2.05 of the LTIP provided:

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. 

Due to purported problems Matthews experienced working under the new COO, he resigned in June 2011 and commenced new employment in August 2011. ONC was sold in July 2012; Matthews did not share in the payout from the Realization Event.

Matthews claimed constructive dismissal and sought damages for loss of the LTIP payout. 

Decision of the Trial Court
The trial court found that the COO engaged in dishonest conduct with Matthews, including lying to him. Based on this, the court decided that the test for constructive dismissal was satisfied.  It set Matthew’s notice period at 15 months and concluded that he was entitled to damages to compensate for the loss of the LTIP payout; its wording did not limit his common law right to such compensation and had Matthews not been constructively dismissed, he would have been a full-time employee when the LTIP payouts were made. Moreover, the LTIP did not contain a general rule that was broad enough to include unlawful termination.  

Decision of the Court of Appeal
The NSCA allowed the appeal in part and set aside the damages awarded under the LTIP, characterizing the LTIP’s language as unambiguously precluding Matthews from being entitled to a payout.  The NSCA accepted the lower court’s findings of fact regarding the COO’s conduct toward Matthews and did not disturb its finding of constructive dismissal or its decision to set the reasonable notice period at 15 months. 

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Decision of the SCC
At the SCC, the constructive dismissal claim was no longer in dispute.  The questions to be decided by the SCC were whether:

• The damages for failure to provide reasonable notice included the disputed bonus; and

• The employer conducted itself dishonestly, and if so, the impact of such conduct by the employer.   

The SCC overturned the decision of the NSCA and, restoring the trial court decision, it held that the damages included the bonus. 

Employer’s Duty to Provide Reasonable Notice
In analyzing the employer’s duty to provide reasonable notice, Justice Kasirer concluded that the NSCA committed an overriding error because it incorrectly focused narrowly on whether the terms of the LTIP were “plain and unambiguous.”  Justice Kasirer confirmed that courts should instead take the following two-step approach proposed by the Court of Appeal in Paquette v. TeraGo Networks Inc., 2016 ONCA 618, which anchors the analysis around reasonable notice before proceeding to examine the contractual terms:

1. Ask whether, but for the termination, the employee would have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period; and

2. If so, determine whether there is something in the terms of the employment contract or bonus plan that unambiguously removes or limits the employee’s common law entitlement.

In applying this analytic framework, the SCC concluded that Matthews was prima facie entitled to receive damages as compensation for the lost bonus.  In arriving at this conclusion, it noted that the Realization Event occurred during the notice period and that had the employee not been dismissed, he would have received the LTIP payment during that period.  

LTIP Clause 2.03
Justice Kasirer then proceeded to conclude that for these reasons, clause 2.03 did not unambiguously remove or limit the employee’s common law entitlement:

• The language requiring the employee to be “full-time” or “active” did not suffice because the employee would have been “full-time” or “actively employed” throughout the reasonable notice period; and

• The language removing an employee’s common law right to damages upon termination “with or without cause” did not suffice because:
  • The clause did not clearly cover the exact circumstances as required because the employee suffered an unlawful termination since he was constructively dismissed without notice; and
  • Even if the clause did expressly refer to an unlawful termination, the employment contract is not treated as terminated until after the reasonable notice period expires.  

LTIP Clause 2.05
For the following reasons, Justice Kasirer concluded that clause 2.05, which prevented the employee from seeking the bonus as part of his “severance,” also did not unambiguously remove or limit the employee’s common law entitlement to damages following his constructive dismissal:

…severance and damages are distinct legal concepts. The primary purpose of providing reasonable notice (or damages in lieu thereof) is to protect employees by providing them an opportunity to seek alternative employment…Severance pay, by contrast, “acts to compensate long-serving employees for their years of service and investment in the employer’s business and for the special losses they suffer when their employment terminates”, and is often provided for in provincial employment standards legislation.

Moreover, clause 2.05 must be read as a whole; it also states that the LTIP “does not have any current or future value other than on the date of a Realization Event”. If Mr. Matthews had been properly given notice of termination, he would have remained a full-time employee on the date of the Realization Event, and thus would have received an LTIP payment. His damages reflect that lost opportunity.1 

Finally, Justice Kasirer indicated that although the issue did not arise on the facts in Ocean Nutrition, it might also be appropriate in certain cases to:

• Examine whether the clauses purporting to remove or limit an employee’s common law right were adequately brought to the employee’s attention; and

• Question whether the clause at issue is compatible with minimum employment standards.2 

Employer’s Duty to Exercise Good Faith in the Manner of Dismissal
In his reasons, Justice Kasirer explained that in a claim for wrongful dismissal where the employee alleges the employer breached its common law duty to provide reasonable notice as well as its duty to exercise good faith in the manner of dismissal, “a breach of a duty of good faith could certainly give rise to distinct damages…including damages for mental distress. Punitive damages could also be available in certain circumstances.”3 The SCC noted that while damages for breach of the obligation to provide reasonable notice are in lieu of reasonable notice, damages for a breach of the duty to exercise good faith in the manner of dismissal are for foreseeable injury resulting from “callous or insensitive conduct in the manner of dismissal.”4 The SCC also indicated that the duty to exercise good faith in the manner of dismissal is owed not merely at the very end of the relationship, but also over the period leading up to the moment of termination. 

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Justice Kasirer noted that Matthews did not seek damages for mental distress and that, although he claimed punitive damages at trial, he did not pursue them on appeal.  Accordingly, the SCC saw no need to decide whether a duty of good faith was breached.  Furthermore, while Justice Kasirer declined to decide “whether a broader duty of good faith exists during the life of the employment contract,” he left open the possibility that it might be judicially recognized in the future.5  In doing so, he noted:

It might be that…a duty of good faith will one day bind the employer based on a mutual obligation of loyalty in a non-fiduciary sense during the life of the employment contract, owed reciprocally by both the employer and employee. I recognize, however, that whether the law should recognize this is a matter of fair debate.6

Bottom Line for Employers

Duty to Provide Reasonable Notice
This SCC decision has clarified the analysis for determining the entitlement to damages for a lost bonus in a wrongful dismissal case.  First it must be confirmed that, but for the termination, the employee would have been entitled to the bonus as part of their compensation during the reasonable notice period.  Only then should consideration be given to whether there is language in the employment contract or bonus plan that unambiguously removes or limits the common law entitlement. 

Furthermore, the SCC puts employers on notice that certain bonus language will not be viewed as unambiguously removing or limiting the employee’s common law entitlement.  The language used by an employer must be clear and unambiguous so that an employee will not be entitled to damages for lost bonus during the reasonable notice period (subject to requirements under employment standards legislation).  Employers are encouraged to seek the advice of experienced employment counsel to draft new employment contracts and bonus plans and to review existing ones to ensure that any clauses removing the entitlement to damages for the value of a bonus during the reasonable notice period will be enforceable.  Finally, employers are also encouraged to ensure that any clauses removing such right to damages are compatible with minimum employment standards, and adequately brought to their employees’ attention.

Duty to Exercise Good Faith in the Manner of Dismissal
The SCC also puts employers on notice that if an employee sues for damages for mental distress and/or punitive damages for a breach of the duty to exercise good faith in the manner of dismissal, and the circumstances are appropriate, a court may declare that the employer breached the duty and award damages.  To help avoid such an outcome, employers are encouraged to treat their employees honestly, in good faith and with dignity in “the manner of their dismissal,” not only at the end of the relationship, but also in the period leading up to the actual termination.