Long Term Incentive Plans Can Have Long Term (and Unintended) Consequences

On October 9, the Supreme Court of Canada ("SCC") released its decision on Matthews v Ocean Nutrition Canada Ltd., 2020 SCC 26.  This highly anticipated decision impacts how courts will interpret employment contracts and incentive plans that purport to limit an employee's entitlement to non-wage benefits following the end of their employment.  The SCC also made comments on the duty of good faith in the performance of an employment contract, foreshadowing legal questions that may be decided in the coming years.
Case Summary
Beginning in 1997, David Matthews ("Matthews") occupied several senior management positions with Ocean Nutrition Canada Limited ("Ocean").  Matthews was part of Ocean's long-term incentive plan ("LTIP"), which said that a future "Realization Event" (including a sale of the business) would trigger payments to employees who qualified under the plan.  The plan had limiting language that indicated only "full-time", "active" employees at the time LTIP payments were due would receive them and precluding eligibility if an employee had been terminated "with or without cause" before the payment trigger date.
In 2007, a new Chief Operating Officer began a campaign to marginalize Matthews, limiting his responsibilities and lying about future prospects with Ocean.  Matthews anticipated Ocean would soon be sold and wanted to stay with the company, however he ultimately took a position with a new employer in June 2011.  Ocean was sold 13 months after Matthews' departure.  Matthews filed a claim for constructive dismissal, alleging that his dismissal was carried out in bad faith.  As part of his claim for damages, Matthews requested payment under the LTIP.
The trial judge concluded that Ocean constructively dismissed Matthews, and that he was entitled to pay in lieu of a reasonable notice period of 15 months.  The trial judge found that the LTIP did not unambiguously limit or remove Matthews' right to the LTIP payment as part of common law damages for remuneration he would have received as if he had remained employed during the reasonable notice period.  Accordingly, Matthews was entitled to damages equivalent to what he would have received under the LTIP, as he would have been a full-time employee when the Realization Event occurred.  
The Nova Scotia Court of Appeal ("NSCA") issued a 2-1 decision overturning the decision of the trial judge, stating that the plain and unambiguous language of the LTIP prevented Matthews from recovering the LTIP amount as part of his damages for wrongful dismissal.  Matthews appealed this decision to the SCC.
The SCC found that Matthews was entitled to his LTIP payment as the language in the LTIP did not unambiguously exclude Matthews' common law entitlement to damages.  The SCC reiterated the principle that when employees sue for constructive dismissal, they are able to claim damages as compensation for the income, benefits, and bonuses they would have received over the reasonable notice period.  In deciding whether an employee is entitled to bonus payments or certain other benefits during a reasonable notice period, a Court will conduct the following two-step analysis:
  1. Is the employee prima facie entitled to receive damages as compensation for the lost bonus?
  2. Does the wording of the bonus plan unambiguously limit or remove the employee's claim to the bonus amount as part of common law damages?
The SCC emphasized that the contractual language that purports to limit an employee's entitlements must be "absolutely clear and unambiguous."  Language that requires an employee to be "full-time" or "active" or language that attempts to limit an employee's entitlement to damages upon termination "with or without cause" will not suffice.
The SCC also briefly touched on the issue of bad faith in the performance of an employment contract.  The SCC noted that Matthews experienced "dishonest conduct" on the part of Ocean, although they declined to state whether any duties of good faith were breached as no claims for damages for mental distress or other harm flowing from the breach of a good faith obligation (as opposed to flowing form the breach of the obligation to provide reasonable notice or compensation in lieu to end employment) were pursued.  The SCC confirmed that the duty of good faith is owed not merely at the very end of the employment relationship, however the SCC left open the question of whether a duty to act in good faith exists for the life of the employment contract.
Key Takeaways
This case serves as a warning that contractual language has to be very clear if the intent is to oust the employee's entitlement to claim bonus payments during a common law reasonable notice period following the end of employment.  This case also serves as a reminder that employers should treat their employees with dignity and respect at all times, not only during termination but also throughout the course of the employment relationship.  
We recommend that employers carefully review their employment agreements and related incentive plans and policies to ensure that they clearly and unambiguously state when entitlement to certain benefits will trigger.  A member of our team would be happy to assist in reviewing your current contracts, plans and policies or to assist in implementing new arrangements.
The information in this update is intended as general information and should not relied on as legal advice.