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October 15, 2020

Supreme Court Weighs in on Whether Employees are Entitled to their Bonus during Reasonable Notice Period

Authors Hendrik Nieuwland, Todd Weisberg and Kenji Nuhn

In a unanimous decision released on October 9, 2020, the Supreme Court of Canada confirmed in Matthews v Ocean Nutrition Canada Ltd. (“Matthews”) that, upon dismissal, employees have a common law right to everything they would have received had they worked through the notice period. This includes non-discretionary bonuses where employee entitlement to the bonus is triggered during the notice period. To limit an employee’s common law right to a bonus during the notice period, employers are required to use unambiguous language in their employment contracts or bonus plans.

Background

David Matthews was a senior executive who had been with Ocean Nutrition Canada Ltd. for 14 years. As a senior executive, Mr. Matthews participated in the company’s long-term incentive plan (“LTIP”) that rewarded employees for their past and continuing contributions to the company. Under the LTIP, a sale of the business triggered a “realization event”, whereby qualifying employees would be entitled to a bonus.

In 2007, the company hired a new Chief Operating Officer, who began reducing Mr. Matthews’ responsibilities within the company. In June 2011, Mr. Matthews resigned and later claimed that he was constructively dismissed. About 13 months after Mr. Matthews had resigned, the company was sold, triggering a “realization event” under the LTIP.

The company took the position that, since Mr. Matthews was not actively employed on the date of the realization event, he was not entitled to LTIP payments.

At trial, the judge held that Mr. Matthews had been constructively dismissed and awarded a notice period of 15 months. The judge held that Mr. Matthews would have been a full-time employee entitled to LTIP payments when the realization event occurred had he not been constructively dismissed, and therefore awarded Mr. Matthews payments for what he would have been owed under the LTIP.

The Court of Appeal upheld the decision that Mr. Matthews had been constructively dismissed and affirmed the 15 month notice period, but reversed the decision of the trial judge on his entitlement to a bonus.

 

Supreme Court of Canada’s Decision in Matthews

The Supreme Court of Canada overturned the Court of Appeal’s decision on Mr. Matthews’ entitlement to LTIP payments. In its reasoning, the Supreme Court explained that employees have a common law right to their bonuses during the notice period. The Supreme Court then endorsed the following two-part test articulated by the Ontario Court of Appeal in Paquette v Terago (“Paquette”) to determine whether an employee should be entitled to damages for unpaid bonuses: 1) would the employee have been entitled to the bonus or benefit during the notice period if they had not been terminated; and 2) does the employment contract or bonus plan unambiguously take away or limit the employee’s common law right to their bonus during the notice period? The first part of the test in Paquette was clarified as follows: if it is unclear whether an employee would have received a bonus during the notice period, a court should determine whether it is “integral” to the employee’s compensation. However, if it is clear that an employee would have received a bonus during the notice period, a court does not need to ask whether the bonus is “integral” to the employee’s compensation.

The Supreme Court also reiterated that any clauses that purport to limit an employee’s common law rights should be brought to the attention of the employee, and must comply with employment standards minimums. In Ontario, the Employment Standards Act (“ESA”) requires employers to continue non-discretionary bonus entitlements during statutory notice periods. Therefore, if employers wish to limit their employees common law rights to bonuses during the notice period, contracts will need to be carefully crafted to ensure they unambiguously do so while remaining compliant with the ESA. 

Applied to the current case, Mr. Matthews would have been eligible for a bonus had he continued to work for the employer during the notice period. Therefore, because the realization event occurred during the notice period, Mr. Matthews was entitled to his bonus. Additionally, the LTIP did not unambiguously limit or remove Mr. Matthews’ common law right to his bonus during the notice period. The LTIP provisions in question were as follows:

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.

2.05 GENERAL:

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.

The Supreme Court of Canada restored the judgment of the trial judge and awarded Mr. Matthews his full bonus valued at $1,086,893.36, less $78,000 for damages Mr. Matthews had mitigated (payments made from his new employer).

Implications for Employers

Employment contracts and bonus plans should be unambiguous in order to limit an employee’s bonus entitlements during any period of reasonable notice. To be unambiguous, they must “clearly cover the exact circumstances that have arisen”. Many employers include a clause in their contracts similar to that found in this case, stating that only “active employees” are eligible for a bonus. Such a clause, without more, will be ineffective in limiting employee bonus entitlements that accrue during the reasonable notice period.

Employers should seek the assistance of legal counsel in drafting bonus clauses that attempt to remove an employee’s common law right to their bonus during any period of reasonable notice following the termination of their employment.

The foregoing is for informational purposes only and should in no way be relied upon as legal advice. For legal advice tailored to your circumstances and business, please contact any of SOM LLP’s lawyers by email or telephone.  

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