Supreme Court of Canada: Incentive compensation is payable during the reasonable notice period absent clear contractual language to the contrary

On October 9, the Supreme Court of Canada released its long-awaited decision in Matthews v. Ocean Nutrition Canada¹, which considered: i) whether employees are entitled to incentive plan compensation during the reasonable notice period; and ii) how the duty of good faith and honesty applies to the performance of employment contracts. The Supreme Court found that incentive plan compensation is payable during the reasonable notice period absent unambiguous language to the contrary in the applicable plan document or employment agreement. With respect to the duty of good faith, the Supreme Court acknowledged that a breach of the duty can ground a claim distinct from a claim for reasonable notice, and indicated that an employer’s duty to act in good faith in the manner of dismissal is not limited to the moment of dismissal.

What you need to know

• Incentive compensation during the reasonable notice period: Incentive compensation will normally be payable during the reasonable notice period, absent clear contractual language to the contrary. Exclusionary clauses that seek to limit an employee’s right to incentive compensation will be strictly construed and must be absolutely clear and unambiguous, covering the exact circumstances that have arisen.
• The duty of good faith in employment contracts: A breach of the duty to exercise good faith in the manner of dismissal is a distinct contractual breach, independent of a failure to provide reasonable notice. The breach need not be limited to the moment of dismissal – it can extend to a series of events culminating in the dismissal.

Factual background

David Matthews was a member of the senior management team of Ocean Nutrition Canada Limited (Ocean). He was eligible to participate in Ocean’s Long-Term Incentive Plan (LTIP) which provided, among other things, that Matthews was entitled to certain payments in the event of a sale of the company.

In 2011, Matthews resigned from his employment after 14 years of service. Approximately one year later, Ocean was sold, thereby triggering the LTIP payments. As Matthews was not employed on that date, he did not receive a payment under the LTIP.

Matthews sued Ocean for constructive dismissal, alleging that over a span of several years, his job description and duties were changed several times and he was gradually removed from involvement in projects that were relevant to his role and expertise. Matthews alleged that he was entitled to a reasonable notice period of 15 months. As the sale of Ocean occurred during the alleged reasonable notice period, Matthews argued he was entitled to the LTIP payment arising from the sale of the company.

Judicial history

At trial, the Nova Scotia Supreme Court found that Matthews had been constructively dismissed and was entitled to 15 months’ notice of termination. The trial judge held that Matthews was entitled to damages equivalent to that which he would have received under the LTIP because: i) Matthews would have been a full-time employee of Ocean at the time of the sale had he not been constructively dismissed; and ii) the terms of the LTIP did not unambiguously limit or remove Matthews’s common law right to damages.

On appeal, the Nova Scotia Court of Appeal agreed with the trial judge that Matthews had been constructively dismissed and was entitled to 15 months’ notice. However, the majority of the Court of Appeal held that the LTIP was ineffective upon Matthews’s resignation as the company had not yet been sold. Accordingly, Matthews was not entitled to any LTIP payment. The Court of Appeal relied on the following exclusionary clause in Ocean’s LTIP:

“[the] Agreement shall be of no force and effect if the employee ceases to be an employee of [Ocean], regardless of whether the Employee resigns or is terminated, with or without cause.”

In interpreting this exclusionary clause, the Court of Appeal relied on the plain language of the clause and on the trial judge’s finding that there was no evidence of intention on the part of Ocean to withhold or deprive Matthews of his LTIP payment through the constructive dismissal.

In a dissenting opinion, Justice Scanlan disagreed and focused heavily on the employer’s implicit duties of good faith and honesty in the performance of an employment contract, principles derived from Bhasin v. Hrynew², which he believed should have resulted in the LTIP payment being awarded as expectation damages.

The Supreme Court’s decision

Bonuses payable during the reasonable notice period absent clear contractual language

The Supreme Court laid out a framework for determining whether damages for reasonable notice of termination should include bonus payments and other benefits. In particular, a court should ask:

1. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period? A remedy for an employer’s failure to provide reasonable notice is “an award of damages based on the period of notice which should have been given, with the damages representing what the employee would have earned in this period”. Because the employment agreement “remains alive” during the notice period, this includes the “income, benefits, and bonuses they would have received had the employer not breached the implied term to provide reasonable notice”.
2. If so, do the terms of the employment contract or incentive compensation plan unambiguously take away or limit the employee’s common law right? Exclusionary terms must be clear and unambiguous, and “must clearly cover the exact circumstances which have arisen”. Because these provisions are unilateral contracts seeking to exclude liability, they will be strictly construed.

On the basis of this analysis, the Supreme Court concluded that Matthews was entitled to the LTIP payment in issue. But for Matthews’s dismissal, he would have received the LTIP payment when Ocean was sold during the reasonable notice period. Further, the relevant exclusionary clause in Ocean’s LTIP (which required Matthews to be a “full-time” or “active” employee to be entitled to the LTIP payment) did not disentitle him to the LTIP payment, as Matthews would still have been an employee at the relevant time had he not been wrongfully dismissed.

Good or bad faith

The Supreme Court concluded that an employer’s duty to act in good faith in the manner of dismissal is not limited to the moment of dismissal, but can be reflected in a course of conduct over a series of events in time culminating in an employee’s dismissal. Further, the Supreme Court concluded that a claim related to an employer’s breach of the duty of good faith is a wholly distinct claim from a failure to provide reasonable notice.

In this case, Matthews claimed he was entitled to damages in the amount of the outstanding LTIP payment as a result of the breach of the duty of good faith. As the Supreme Court found that Matthews was entitled to the LTIP payment as part of his reasonable notice claim, the Supreme Court did not consider the matter further.

In obiter, the Court commented that it might be that one day a duty of good faith will bind the employer based on a mutual obligation of loyalty during the life of the employment agreement.

Practical considerations

In light of this decision, employers should review their incentive compensation plans and employment agreements, with a view to ensuring they contain clear and unambiguous language regarding an employee’s entitlement to incentive compensation during the notice period.

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¹ 2020 SCC 26

² 2014 SCC 71