Supreme Court of Canada Clarifies Law: Bonuses During Notice Period Must Be Paid, and Employers Should Not Act Dishonestly

Authors: Christopher Rootham and Adrienne Fanjoy

In Matthews v Ocean Nutrition Canada Ltd., the Supreme Court of Canada has clarified the rules around bonus payments or other incentive payments that become payable during the notice period after an employee is dismissed. The Supreme Court also made it clear that employers should not act dishonestly and may have to pay damages if they do so.

Facts of the Case

David Matthews was an experienced chemist and senior manager with Ocean Nutrition Canada Limited.  His job was great until Ocean Nutrition hired a new Chief Operating Officer who did not like Matthews.  This Chief Operating Officer embarked on a four-year campaign to push Matthews out. Eventually, Matthews had enough: he left Ocean Nutrition in 2011.  Matthews was constructively dismissed and claimed damages as a result.  By the time the case reached the Supreme Court, neither his constructive dismissal, nor his 15-month notice period were in dispute.

Most importantly, Ocean Nutrition had a long-term incentive plan (“LTIP”) that was triggered by the sale of the company ( “realization event”) (the sale of the company).  The sale happened 13 months after Matthews was constructively dismissed – well within his 15-month notice period.  The LTIP had two clauses that, Ocean said, deprived Matthews of payment:

• 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.

Supreme Court Provides Helpful Clarity

The Supreme Court’s decision provides welcome clarity about how to analyze damages in wrongful dismissal or constructive dismissal cases.  The Court started by distinguishing the two distinct contractual breaches in this case:

1. The failure to provide reasonable notice of dismissal; and
2. The failure to meet the expected standard of good faith.

The Court was very clear that these are two distinct contractual breaches and must be considered separately.

Failure to Provide Reasonable Notice

The Court started with the settled proposition that an employee dismissed (or constructively dismissed) without notice is entitled to damages representing the value of their compensation during the notice period – including bonuses.  This means that, when looking at bonuses or other non-salary benefits, a court must examine two things:

1. But for the termination, would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?
2. Is there something in the bonus plan or employment contract that would unambiguously take away that right?

In some earlier cases, courts had inserted a third requirement into this test: that the bonus plan be an “integral” part of the employee’s compensation package.  The Supreme Court of Canada was clear: this is not a stand-alone requirement.  Instead, the question of whether the plan was “integral” is only relevant at the first stage of the test when considering discretionary bonuses.  If there is doubt whether the employee would have received a discretionary bonus, that doubt can be resolved by looking at whether the bonus was “integral”; otherwise, this so-called “integral test” is not relevant.

The Court went on to conclude that the language used in those clauses did not unambiguously take away Matthews’ right to receive the LTIP.  The Court pointed out that the LTIP was a “unilateral contract” that was not negotiated; therefore, any clause that attempted to exclude or limit liability must be strictly construed against the employer.  The Court went on to say that language requiring an employee to be “full-time” or “active” will not remove the right to damages – because if the employee had been given proper notice, they would have been “full-time” or “active” throughout the notice period.  Similarly, the use of the phrase “with or without cause” was not sufficient because Matthews was unlawfully terminated.  As the Court put it: termination without cause is not termination without notice.  Finally, the Court said that the use of the phrase “severance calculation” did not assist the employer because notice and severance are different concepts.

The Court also took the opportunity to clarify that damages are for breach of the obligation to provide notice – damages are not pay in lieu of notice.  The Court pointed out that there are important differences between damages and pay in lieu – including that damages may be mitigated but pay in lieu cannot.

The Court concluded that Matthews was entitled to payment of the roughly $1million LTIP payment.

Good Faith and Honest Conduct

In light of its finding about the LTIP, the Court stated that it was not necessary to make any remedy for bad faith conduct: Matthews only sought his LTIP payment and did not seek damages for mental distress.  Despite that finding, the Court took the opportunity to state some interesting things about good faith:

1. The duty of good faith “in the manner of dismissal” does not exist only at the very end of the employment relationship. So long as the misconduct is a component of the manner of dismissal it is “in the manner of dismissal” – even if the misconduct goes back years.
2. There may be a duty of good faith throughout the employment relationship. The Court called this “a matter of fair debate” and did not rule it out – but it was not necessary to deal with it in this case because this was a dismissal case.
3. The Court acknowledged the importance of judicial acknowledgement of bad faith behaviour or some recognition that an employee has been mistreated. The Court did not issue a formal declaration of a contractual breach related to good faith, but it still acknowledged Ocean’s dishonest treatment of Matthews.

Other Take-Aways

As often happens in Supreme Court cases, there were some interesting nuggets buried in the decision.

1. Matthews did not argue that, to the extent the LTIP came to an end during his notice period, it violated Nova Scotia’s employment standards legislation. Like in Ontario, this legislation requires an employer to maintain all wages and benefits during the statutory notice period.  The Court acknowledged that: “as several interveners commented on in this appeal, it may be appropriate to question whether the clause at issue is compatible with minimum employment standards.”  This is a strong signal from the Court that bonus plans that unambiguously deprive an employee of payment during a reasonable notice period may still be void if they do not protect payment during the statutory notice period.
2. I have always had serious reservations about whether the doctrine of mitigation should apply to reasonable notice claims. The Supreme Court appeared to confirm that mitigation continues to apply when it gave that as one reason to reject a “pay in lieu of notice” contractual term in favour of a “damages for failure to provide notice” approach instead.  I refuse to give up hope that, in the right case, the Supreme Court or another appellate court will reconsider whether mitigation should continue to apply;for now, it appears mitigation remains alive and well.
3. In addition to unambiguous language, the Court also stated that any limitation clauses in bonus plans must be brought to the employee’s attention.
4. This point is mentioned above, but it bears repeating: employment contracts, which are rarely negotiated, will be strictly construed against the employer as the drafting party.

The most important take-aways from this decision, though, are these: first, reasonable notice and good faith in the manner of dismissal are fully distinct contractual terms that can have separate compensation; and second, reasonable notice damages are the value of an employee’s entire compensation during the notice period –an employer can only avoid payment of bonuses, commissions, tips, or other non-salary compensation during the notice period by using clear and unambiguous language (that it brings to the employee’s attention) stating specifically that the amounts will not be paid even if the employer acts unlawfully.

The Court’s decision is a helpful clarification about the calculation of damages during a notice period, and about how courts and claimants should approach bad faith cases in the future.  The nuances of the Court’s decision will likely be explored in future cases, but for now there is admirable clarity in how to calculate damages during the notice period and that good faith in the manner of dismissal is a separate, stand-alone obligation.