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Guidance from the Supreme Court of Canada regarding entitlements during the reasonable notice period

Employment Bulletin
27.10.20
By Bob Graham, Janna Young, James Jeffrey and Yang Guo (Student-at-Law)

The Supreme Court of Canada (SCC) has recently rendered a judgment on how an employee's entitlements to bonuses and long-term incentive awards should be assessed as damages for wrongful dismissal. This decision will have significant implications for employment law in Canada.

In its October 9, 2020 decision, Matthews v Ocean Nutrition Canada Ltd, the SCC held that incentive plan compensation is payable during the reasonable notice period absent clear and unambiguous exclusionary language in the applicable plan document or employment agreement.

The case provides further guidance for employers wishing to limit the amount of equity compensation or other benefits payable to an employee upon the termination of employment. Employers should review the wording of their current employment contracts and incentive plans to ensure they clearly and unambiguously remove an employee’s common law right to claim the incentive payments as part of their damages upon the termination of employment. In addition, employers should bring any exclusionary clauses to their employees' attention before such clauses apply to them.

Background

David Matthews was a senior chemist and executive with Ocean Nutrition Canada (the Company). During his employment, he participated in the Company's long-term incentive plan (LTIP), which stipulated that upon the sale of the Company, certain employees would receive a payment.

Matthews resigned after a change in the Company's management resulted in an intolerable working environment. The Company was sold roughly one year later. Matthews then sued the Company for constructive dismissal, seeking damages for, among other things, the LTIP payment he would have received had he remained an employee through to the date the Company was sold.

The Company argued that the terms of the LTIP precluded Matthews from receiving any LTIP payment, as he was not an employee on the date the Company was sold.

The LTIP provided, in part:

2.01-  PAYMENT OF EXECUTIVE INCENTIVE: Provided the conditions precedent set out in Section 2.03 are satisfied on the date on which a Realization Event occurs, ONC shall pay to the Employee, in cash, less any appropriate withholding of other taxes, an amount calculated in accordance with Section 2.02, which payment shall be made within thirty (30) days of such Realization Event.

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.

Lower Court Decisions

The trial judge held that the Company constructively dismissed Matthews and owed him damages equivalent to what he would have received over a 15-month working notice period, including an amount for the LTIP payment.

The Nova Scotia Court of Appeal upheld the trial judge's decision with respect to constructive dismissal and the length of the notice period, but held that the trial judge confused an employee's right to reasonable notice with an employee's ability to recover under an incentive plan. The proper question, they said, was whether the employee qualified for an LTIP payment under the terms of the LTIP. In their view, clause 2.03 of the LTIP was unambiguous, leading to the conclusion that Matthews' right to recover under the LTIP ceased as of the date he was no longer actively employed by the Company. They further held that clause 2.05 clearly stated that the LTIP could not be used for "severance" purposes, which, in their view, the trial judge had erroneously done.

Supreme Court of Canada Decision

The SCC set aside the judgment of the Nova Scotia Court of Appeal and found that the LTIP did not unambiguously limit Matthews' common law rights. The SCC held that courts should ask two questions when deciding whether wrongful dismissal damages should include bonus payments, incentive payments, or other employment benefits:

  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 to compensation?

The Company argued that under the first step of the test, Matthews only had a common law entitlement to damages for remuneration that was "integral" to his compensation. The Company maintained that the LTIP payment was not integral since he did not have a vested right to an LTIP payment at the date of termination.

The SCC disagreed. The test for whether a benefit or bonus is "integral" to the employee's compensation assists in answering the question of what the employee would have been paid during the reasonable notice period. For example, where bonuses are discretionary, courts consider the "integral" test as there is doubt as to whether the employee would have received the discretionary bonuses during the notice period. However, the SCC distinguished those cases from the facts in Matthews, as it was uncontested that the Realization Event (the sale of the Company) occurred during the notice period and but for Matthews' dismissal, he would have been employed on the date of the Realization Event and therefore would have received an LTIP payment. In such circumstances, the Court held that there is no need to ask whether the LTIP payment was "integral" to his compensation.

Clear and unambiguous language is required to limit common law rights

The SCC applied its two-part test and determined that the Company's LTIP did not clearly and unambiguously limit Matthews' LTIP entitlement. In considering the kind of language that would unambiguously take away or limit the common law right, the SCC made the following observations:

  1. Language requiring an employee to be "full-time" or "active", such as clause 2.03, is insufficient to remove an employee's common law right to damages since, in Matthews' case, had he been given proper notice, he would have been "full-time" or "actively employed" through the reasonable notice period.
  2. Language purporting to remove an employee's common law right to damages upon termination "with or without cause", such as clause 2.03, is insufficient because termination "without cause" does not imply termination "without notice". In any event, for the purposes of calculating wrongful dismissal damages, the employment contract is not treated as "terminated" until after the reasonable notice period expires, meaning that even if the clause had expressly referred to an unlawful termination, it would not unambiguously alter the employee's common law entitlement.
  3. There is a legal difference between "severance" and "damages for wrongful dismissal". The purpose of reasonable notice or pay in lieu of notice is to provide employees with the opportunity to seek alternate employment. In contrast, severance compensates long-service employees for their years of service and for the special losses they suffer when their employment terminates. Language referring to "severance" only is insufficient to limit the employee's common law entitlement.

Obligation to bring exclusionary clauses to the employee's attention

The SCC commented in Matthews that it may also be appropriate in certain cases to examine whether a clause purporting to limit or take away an employee's common law right was adequately brought to the employee's attention.

This issue was front and centre in the recent Ontario case Battiston v Microsoft Canada Inc. Battiston was a long-term employee of Microsoft and was terminated without cause in Microsoft's 2018 fiscal year. His compensation included discretionary merit increases, cash bonuses, and stock awards, under Microsoft's Rewards Policy. The bonus payments reflected an employee's impact on team, business, and customer results over the year, and made up about 30% of Battiston's total compensation. Microsoft argued that Battiston was not entitled to merit increases or cash bonuses for the 2018 fiscal year, and was no longer entitled to the vesting of any granted but unvested stock awards following his termination date. Battiston brought a claim alleging he was entitled to the bonus and to vest his stock awards.

The Ontario Superior Court of Justice applied essentially the same two-step test articulated in Matthews to determine Battiston's entitlement to a bonus award during the notice period. Battiston had received a merit increase and cash bonus every year except the last year of his employment. The Court thus found that the merit increase and cash bonus under were integral parts of Battiston's total income, and nothing in Microsoft's policy removed his common law right to receive bonuses during the notice period.

Although the stock awards were similarly found to be integral to Battiston's compensation, the Court found that the Stock Award Agreement unambiguously excluded his right to vest his stock awards. The clauses at issue provided that an employee's right to vest stock awards terminated when the employee was no longer actively employed for any reason, even if such reason was unlawful (such as a wrongful or constructive dismissal).

However, the Court avoided this exclusion by finding that Microsoft had not adequately brought the provisions to Battiston's attention by way of their practice of sending annual emails advising employees of their stock awards and requiring employees to click a button indicating they had read the email. Battiston confirmed he had never read any of the agreements in detail due to their length and complexity, but still clicked the button in the email. This brought the clause within the purview of the Tilden Rent-A-Car Co v Clendenning line of cases, which had held that inadequate notice of a particularly unfair term may render that term unenforceable.

The Court found the termination provisions in the Stock Award Agreement were harsh and oppressive, as they precluded Battiston’s right to have unvested stock awards vest if his employment were terminated without cause. Accordingly, the Court awarded damages in lieu of the shares awarded that would otherwise have vested in his reasonable notice period.

On August 18, 2020, Microsoft filed a Notice of Appeal on the grounds that the trial judge failed to apply the correct test for the enforceability of a termination clause in a stock awards plan by imposing an additional "harsh and oppressive" standard not required at law, and by finding that the Stock Award Agreement was within a class of contracts not subject to the rule from Tilden Rent-A-Car. The appeal has yet to be heard.

Takeaways for employers

1. Clear and unambiguous language

  • If an employer wishes to limit an employee's common law rights to a bonus, incentive payment, or other benefit during the common law reasonable notice period, it must do so clearly and unambiguously.

2. Draw the exclusionary clause to the employee's attention

  • In light of the Ontario Superior Court of Justice decision in Battiston, and comments made by the Supreme Court of Canada in obiter in Matthews, employers should make efforts to ensure that exclusionary clauses are adequately brought to an employee's attention.
  • Although the courts did not provide express examples of how to adequately bring an exclusionary clause to an employee's attention, it clearly will take more than having an employee simply acknowledge receipt of a plan document.

3. Review your employment agreements and policies

  • The Matthews decision has highlighted the importance of employers having properly drafted employment contracts and incentive plan documents in the event that they wish to limit an employee's incentive compensation during the common law reasonable notice period.