The recent Supreme Court of Canada (the “Court”) decision in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26 [Matthews], serves as a reminder for employers that significant care and attention is required when preparing plans such as long-term incentive plans, bonus plans and employee stock option plans that vest over time.  In Matthews, the Court restored the judgment of the Supreme Court of Nova Scotia, awarding the plaintiff more than $1 million in compensation for the loss of a bonus he would have received under Ocean Nutrition’s long-term incentive plan (LTIP), but which did not become payable until 13 months after the plaintiff resigned and claimed constructive dismissal.

The Court noted that this case was an opportunity to clarify an employer’s common law duty to provide reasonable notice of termination, and more particularly the proper assessment of damages in relation to bonuses and other benefits if that duty is not met.

The Court approved a two-part test developed by the Ontario Court of Appeal for determining whether the appropriate quantum of damages for a breach of the duty to provide reasonable notice includes bonus payments and other benefits.  First, would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?  Second, if so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?

Under the terms of the LTIP in Matthews, the bonus was triggered upon a “realization event”; namely, the sale of the employer, Ocean Nutrition.  However, the LTIP also provided that:

1. Ocean Nutrition had no obligation to pay the bonus unless on the date of the realization event, the plaintiff was a full-time employee of Ocean Nutrition;
2. the LTIP agreement would be of no force and effect if the plaintiff ceased to be an employee of Ocean Nutrition, regardless of whether the plaintiff resigned or was terminated, with or without cause; and
3. the bonus did 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 plaintiff’s compensation for any purpose, including in connection with the plaintiff’s resignation or in any severance calculation.

The lower court’s decision that the plaintiff was constructively dismissed and was entitled to 15 months of reasonable notice was not appealed to the Supreme Court of Canada.  As such, in considering the plaintiff’s entitlement to damages and the first part of the above test, the Court noted it was uncontested that the realization event occurred during the 15-month notice period and that the well-established purpose of damages in lieu of reasonable notice is to put the employee in the position they would have been in had they continued to work through to the end of the notice period.  The Court reasoned that but for the plaintiff’s dismissal, he would have received the LTIP bonus during the 15 month notice period. 

With respect to the second question, the Court concluded that the terms of the LTIP did not unambiguously limit or remove the plaintiff’s common law right to receive damages as compensation for the lost bonus.  The fact that the LTIP was a unilateral contract (because the terms were not subject to negotiation) meant it was particularly important to apply the principle of contractual interpretation that any clauses excluding or limiting liability should be strictly construed.  To this end, the Court opined that language requiring an employee to be “full-time” or “active” at the time of a realization event is not sufficient to remove an employee’s common law right to damages.  Nor is language purporting to remove common law rights to damages upon termination “with or without cause” sufficient.  As a result, the Court concluded that the terms of the LTIP did not unambiguously limit or remove the plaintiff’s common law right to damages for the loss of the LTIP bonus payment.

The decision does not provide examples of what type of language would be sufficient to remove an employee’s common law right, but reiterated that exclusion clauses must clearly cover the exact circumstances which have arisen.  While Matthews does not necessarily change the law, it demonstrates the level of scrutiny courts will apply in the second part of the test when determining if an employment contract or bonus plan unambiguously takes away or limits a common law right to damages in relation to entitlements under deferred compensation plans.  Employers may wish to review the terms of their deferred compensation plans in light of this decision.