Drafting Dilemma: SCC Says Unambiguous Language is Needed to Limit Incentive Compensation During the Reasonable Notice Period, But Leaves Employers Without Concrete Guidance

October 14, 2020

The Supreme Court of Canada has affirmed the test for determining whether bonus payments, and other benefits, should be included in the quantum of damages for a breach of the implied term to provide reasonable notice. In circumstances where an employee is entitled to a bonus as part of their compensation during the reasonable notice period, employers must use clear and unambiguous language if they wish to limit that entitlement. Unfortunately, it remains unclear as to what language will be good enough to do so: Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 (Matthews”).

The Supreme Court of Canada ("SCC") has just rendered a decision in Matthews clarifying the remedy for a breach of the implied term to provide reasonable notice, in particular with respect to bonus entitlements. At common law, an award of damages for this breach of the employment contract is based on the period of notice which should have been given, with the damages representing what the employee would have received in this period. The SCC affirmed the test for determining whether the appropriate quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and certain other benefits. A brief summary of the case, and the key takeaways, are set out below.

Facts

The appellant ("Employee"), an experienced chemist, was employed by the respondent ("Employer") from 1997 to 2011. The Employee occupied several senior management positions and as a senior executive participated in the Employer's long-term incentive plan ("LTIP"). Under the LTIP, a "Realization Event", such as the sale of the company, would trigger payments to eligible employees.

Key provisions of the LTIP included the following:

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 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.
...

2.05     GENERAL:

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.

In 2007, the Employer hired a new Chief Operating Officer ("COO") who developed a dislike of the Employee and began a campaign to marginalize him. Despite the issues that developed with the COO, the LTIP was a key reason why the Employee stayed, as he anticipated that the Employer would be sold soon. However, the Employee eventually resigned and took a position with a new employer in 2011.

Approximately 13 months following the Employee's departure, the Employer was sold. The sale constituted a "Realization Event" for the purposes of the LTIP. Since the Employee was not employed by the Employer on the date of the sale, the Employee did not receive a payment. The Employee filed a claim against the Employer for constructive dismissal, alleging his job duties were changed over the course of several years leading up to his resignation and that he would be entitled to a reasonable notice period of 15 months, which would include the Realization Event.   

Prior Decisions

Trial Decision (2017 NSSC 16, 2017 NSSC 123)

The Nova Scotia Supreme Court concluded that the Employee was constructively dismissed (due, in particular, to the conduct of the COO) and was entitled to a reasonable notice period of 15 months.

With respect to the LTIP, the trial judge concluded that the Employee would have been a full-time employee when the Realization Event occurred but for the constructive dismissal, therefore he was entitled to damages equivalent to what he would have received under the LTIP. The language in the LTIP was not considered to be enough to limit the Employee's LTIP entitlement since it did not unambiguously limit or remove his common law right to damages.

The trial judge rejected the Employee's claim for punitive damages as he was not satisfied that the Employer's actions were directly motivated by a desire to deprive the Employee of his LTIP entitlements.

Court of Appeal Decision (2018 NSCA 44)

The Nova Scotia Court of Appeal unanimously upheld the trial judge's decision that the Employee was constructively dismissed and was entitled to a reasonable notice period of 15 months. However, the three member bench was split two to one on the issue of damages and the relevance of good faith.

The majority overturned the trial judge's decision regarding the Employee's LTIP entitlements. The majority concluded that the trial judge "confuse(d) an employee’s common law right to reasonable notice, with the employee’s ability to recover damages arising under an incentive plan" and "failed to properly analyze the actual terms of the [LTIP]."  The majority of the Court concluded that pursuant to clauses 2.03 and 2.05 of the LTIP (as set out above), there was no ambiguity that the LTIP ceased to be of any force and effect upon an employee's resignation or termination and that the LTIP was not to be considered in the severance calculation.

The dissenting judge primarily focused on the allegations of bad faith and dishonesty and was of the view that the LTIP should be considered to measure the damages for the constructive dismissal. In particular, he stated that he would "have awarded costs on th(e) appeal to [the Employee] in the amount of 30% of appropriate trial costs".

SCC Decision

In a unanimous decision, the SCC set aside the Court of Appeal’s judgment and restored the trial judgment. On appeal to the SCC, the fact that the Employee was constructively dismissed and was entitled to notice was no longer in dispute. However, the parties continued to disagree as to the remedies that should be afforded to the Employee at common law, in particular whether the failure to provide damages for reasonable notice included the LTIP payment.

Duty to Provide Reasonable Notice

At common law, employees are entitled to reasonable notice of termination as an implied term of the employment contract. The SCC clarified that the remedy for a breach of this implied term 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 received in this period. The SCC concluded that when determining whether the appropriate quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and certain other benefits, courts should ask two questions:

  1. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?
  2. If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?

The SCC noted that the issue of whether the bonus or benefit is integral or discretionary can be considered as part of the first question, to determine if the employee would have received the bonus or benefit during the reasonable notice period.

With respect to the second question, the SCC noted that the terms will be strictly construed and must be absolutely clear and unambiguous. Language requiring an employee to be “full-time” or “active” will not suffice to remove an employee’s common law right to damages. Additionally, language that removes an employee's common law right to damages upon termination will not suffice since, for the purpose of calculating wrongful dismissal damages, the employment contract is not treated as "terminated" until after the reasonable notice period has lapsed.

The SCC briefly addressed the Alberta Court of Appeal’s decision of Styles v Alberta Investment Management Corporation (2017 ABCA 1; application for leave refused, 2017 CanLII 32940), which the Employer attempted to rely upon with respect to the interpretation of clauses 2.03 and 2.05 of the LTIP. The SCC noted that Styles was easily distinguishable because it dealt with a bonus which would not have vested until years after the employee's termination, as opposed to during the reasonable notice period.

Duty to Act in Good Faith

The Employee did not seek damages for bad faith in the manner of his dismissal beyond the LTIP amount claimed and because the SCC found the Employee was entitled to the LTIP payment, it did not consider this claim further.  However, the SCC highlighted that a breach of the duty to exercise good faith in the manner of dismissal is a distinct contractual breach from a breach of the implied term to provide reasonable notice. In addition, the SCC emphasized that an employer’s duty to exercise good faith in the manner of dismissal will not always relate solely to the moment of dismissal or the very end of the employment relationship, but in circumstances of constructive dismissal can be extended to include a series of events leading up to a “tipping point”. However, the Employee (and certain interveners in the case) did urge the SCC to recognize good faith as a duty that applies during the entire employment contract. The SCC did not do so but noted in passing that this was a serious argument which is a matter of fair debate and that one day a duty of good faith might bind employers based on a reciprocal obligation of loyalty during the employment relationship.

Key Takeaways[1]

The Matthews decision makes clear that strict and unambiguous language will be required to deprive an employee of a bonus or benefit during the notice period. However, it remains unclear exactly what language will be sufficient as the SCC provided only a few examples of language that will not suffice to remove an employee's entitlement to bonuses during the reasonable notice period. In addition, the SCC’s quick distinction of the Styles decision appears to have been a missed opportunity to provide further clarity to employers and employees alike. For example, notwithstanding the LTIP vesting duration in Styles, the Alberta Court of Appeal expressly found that Mr. Styles’ LTIP “left no doubt as to whether [Styles] had to be actively employed on the vesting date. It also left no doubt that any period of “reasonable notice” required in lieu of notice of termination did not qualify as “active employment”. This is not a case where the court has to imply the terms in an agreement, fill in gaps, or interpret vague provisions.” Thus, to the Alberta Court of Appeal, Mr. Style’s LTIP appeared to unambiguously deprive him of any entitlement during the notice period.

As a SCC decision, Matthews is binding in all Canadian jurisdictions. However, the interplay between the SCC decision and decisions, such as Styles, will be interesting to follow. In the meantime, employers should closely examine the current language in their bonus and incentive plans and consider redrafting their exclusionary clauses, if necessary.


[1] Commentary from a Quebec perspective will follow.

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