Does Your Company Incentive Plan or Stock Option Use the Term “Actively Employed”?

On October 9, 2020, the Supreme Court of Canada (“SCC”) decided in Matthews v Ocean Nutrition Ltd.[i], that a dismissed employee while still in their termination period is entitled their employment bonus.

Background

In 1997, David Matthews began his employment with Ocean Nutrition Canada Limited (“Company”) as a chemist and went on to hold various senior executive roles in the organization until his resignation in June of 2011.

Matthews was eligible to participate in the Company’s Long Term Incentive Plan (LTIP). Under the program, a “Realization Event”, such as the sale of the Company, would trigger payments to participating employees.

The relationship soured, and ultimately Matthews left the Company.  He did not allege constructive dismissal at the time of his departure.

After 13 months of Matthew’s departure, the Company was sold for $540 million triggering an LITP payment for employees. Matthews would have been entitled to a payout of approximately $1.1 million.

Matthews sued the Company for constructive dismissal and that he would be entitled to a reasonable notice period of 15 months, which would then include the Realization Event.

Lower Court Decisions

Both the trial judge and the Court of Appeal found that Matthews was constructively dismissed and was entitled to reasonable notice of his termination of 15 months. However, the trial judge and Court of Appeal disagreed on whether he was entitled to the  LTIP.  The issue was the exclusionary clauses in the LTIP wording (emphasis ours):

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.

SCC Decision

The SCC allowed the appeal and restored the trial judge’s decision that Matthews was entitled to the LTIP.  Specifically:

1. The SCC decided that at common law, bonus payments were payable during reasonable notice periods absent clear contractual language. In determining the quantum of damages for the breach of the implied term, Justice Kasirer provided two questions that the courts should ask[ii]:

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

The SCC stated that absent clear contractual language to the contrary, incentive compensative will normally be payable during the reasonable notice period. Any exclusionary clauses will be strictly construed and must be clear and unambiguous to cover the exact circumstances for exclusion.[iii] Here, the terms of the LTIP did not unambiguously take away or limit Matthew’s common law right to receive damages. The language in the exclusionary clause that required Matthews to be a “full-time” or “active” employee did not disentitle him because Matthews would still have been an employee at the Company had he not been dismissed. As well, the language that would have purported to remove Matthew’s common law right to damages “with or without cause” is insufficient because even had he been lawfully terminated, the termination would have occurred at the end of the notice period.[iv]

  1. There is a duty of good faith in employment contracts

The SCC also clarified that an employer’s duty to act in good faith in the manner of dismissal is not limited to the moment of dismissal but determined in the course of conduct over a series of events that culminates in the employee’s termination. However, as Matthews did not seek punitive damages for his treatment by the Company, the SCC did not comment on the whether the Company had breached a broader duty of good faith to Matthews and clarified that a claim related to an employer’s breach of the duty of food faith is distinct from a claim of failure to provide reasonable notice.  However, in obiter, the SCC left open the possibility that one day a duty of good faith may bind the employer based on the mutual obligation of loyalty during the term of the employment agreement.[v]

In light of this decision, it is important for employers to review the terms of their Incentive Plans, Bonus Structures and Stock Option Plans to see if their wording is impacted by this decision. The term “actively employed” is common and now appears to be insufficient to oust the common law that a terminated employee will be entitled to such a benefit if it occurs during his or her notice period (absent other considerations). To discuss this Supreme Court of Canada decision and its impact on drafting employment agreements, please contact EKB’s Employment team.

[i] 2020 SCC 26

[ii] Ibid., at para. 55.

[iii] Ibid., at para 65.

[iv] Ibid., at para 66.

[v] Ibid., at paras. 85-86.

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