Is an employee entitled to their incentive bonus pay after constructive dismissal? Canadian courts have continued to debate the exclusion of bonus entitlements arising during the reasonable notice period after employment is terminated.
The Supreme Court of Canada recently rendered its decision in David Matthews v Ocean Nutrition Canada Limited (“Matthews”) which will hopefully provide some clarity in how the entitlement to these types of benefits are assessed. The Matthews decision affirms the established framework that courts should first inquire whether or not the former employee would have been entitled to the bonus despite the termination and then, second, whether or not the written terms of the employment contract unambiguously limit that bonus entitlement.
David Matthews, while employed as a senior executive with Ocean Nutrition Canada Limited, was entitled to a share of the proceeds if the company sold. This was part of the incentive plan agreement included in his employment contract.
The courts agreed that Mr. Matthews was constructively dismissed and entitled to 15 months of reasonable notice. During that period of time, the company was sold, which would have triggered Mr. Matthews’ bonus entitlement had he remained employed.
The trial judge found that the exclusionary provisions were insufficiently clear and express in limiting Mr. Matthews’ bonus entitlement upon his constructive dismissal and therefore unenforceable, resulting in a judgment in Mr. Matthews’ favour for over one million dollars.
On appeal, a majority of the Court of Appeal reversed the trial decision regarding the bonus entitlement, holding that the incentive plan agreement was of no force and effect once Mr. Matthews’ employment with Ocean ceased.
In unanimous reasons written by Justice Kasirer, the Supreme Court of Canada held that the Court of Appeal erred in not awarding Mr. Matthews damages equal to the bonus on the sale of the company by misapplying established contractual principles. By applying the correct framework to the exclusionary provisions of the agreement, the Court endorsed the trial judge’s conclusions. In doing so, the Court observed that the key contractual interpretation issue relates not to whether or not the incentive plan exclusion language itself is ambiguous but, rather, more narrowly “whether the wording of the plan unambiguously limits or removes the employee’s common law rights.” (at para 64).
The Court further commented on how the contractual duty of good faith is to be applied to this and other wrongful or constructive dismissal cases. The common law duty of trust, honesty and good faith is a relatively new concept and has its origins in Bhasin v Hrynew, 2014 SCC 71. Read our “Keeping the Faith – Five Years After Bhasin v Hrynew” blog for more information. The scope and practical implications of this duty are still being tested and explored before the courts. Here, the Supreme Court affirmed that the duty of good faith is indeed relevant prior to an employee’s departure and in some circumstances may be compensable as damages for mental distress or other remedies. These issues were determined to have not been properly included in the pleadings or clearly argued before the Court on appeal and were not awarded. The Court did however acknowledge the mistreatment that Mr. Matthews received while employed at Ocean.
An important takeaway from this decision is that employers need to ensure that their incentive plans and bonuses with employees are carefully drafted with unambiguous exclusionary clauses in order to ensure that former employees are not entitled to unintended future benefits. Employers should also be mindful of possible risks with respect to existing agreements and may want to review these with their legal counsel. MLT Aikins has a leading team of lawyers throughout Western Canada who have particular focus in advising employers in respect of these and other issues.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.