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Will the Supreme Court of Canada Clarify What Language Is Required to Exclude Bonus and Incentive Plan Entitlements from Termination Pay?

Will the Supreme Court of Canada Clarify What Language Is Required to Exclude Bonus and Incentive Plan Entitlements from Termination Pay?

By November 14, 2019March 4th, 2022No Comments

When an employee is terminated without cause, he or she is generally entitled to reasonable notice or pay in lieu thereof. The employer is required to pay the employee all of the regular compensation that he or she would have received during the notice period. Regular compensation means more than base salary – it includes benefits such as non-discretionary bonuses and stock option plan entitlements.

Many employers attempt to limit entitlements to such benefits by including clauses in incentive and bonus agreements that require “active employment” for the agreement to remain in effect, or that extinguish benefits upon an employee’s termination. Ontario courts have held that it will be assumed that such agreements contemplate lawful termination as the trigger. In cases where the dismissal is without cause, lawful termination occurs at the end of the common law notice period, as the employee still has a contractual right to work and to be compensated during that time. Therefore, when interpreting agreements with such clauses, the termination of the employee’s active employment as contemplated by the agreement will be assumed to be at the end of the common law notice period, regardless of whether the employee actually worked during that time. 

It is still possible for employers to successfully extinguish these entitlements on the date that the employee ceases to perform services, without regard to whether he or she is paid salary in lieu of notice of termination. However, to do so, the language in the agreement must express this intention clearly and unambiguously. Inconsistent decisions by the courts have made it difficult to know exactly what language will successfully achieve this.

The Supreme Court of Canada appears to agree. The Court will hear the appeal of Ocean Nutrition Canada Ltd. v Matthews, 2018 NSCA 44 (CanLII), in which the Nova Scotia Court of Appeal reversed a hearing judge’s decision to award the Plaintiff damages for loss of entitlements under his Long Term Incentive Plan (“LTIP”) during the notice period.

Matthews worked for Ocean Nutrition Canada Ltd (“Ocean Nutrition”) or its predecessors for 14.5 years until he resigned and sued them for constructive dismissal. The Court of Appeal agreed with the hearing judge that Matthews was constructively dismissed. However, it disagreed on his entitlements.

Matthews was party to an LTIP under which 2% of the company’s value created on the sale or public offering of the company in excess of $100M would be distributed among those who were party to the plan. Less than one year after Matthews was constructively dismissed, and within the 15-month common law notice period, as determined by the courts, a company called Royal DSM N.V. acquired Ocean Nutrition. Matthews would have received $1,086,893.36 as a result.

The hearing judge held that “Matthews has a common law right to damages for the loss of the payout he would have received under the LTIP unless the agreement limits this right”. Finding that the language in the agreement was not sufficient to extinguish the entitlement, Matthews was awarded damages.

The Court of Appeal reversed the decision, stating that the hearing judge confused an employee’s common law right to reasonable notice with the employee’s ability to recover damages arising under an incentive plan. The Court agreed with the hearing judge that if the only condition for payout under the LTIP was that Matthews be a fulltime employee, he may have been entitled to such damages. However, it relied on the following provision of the LTIP in holding that there was no ambiguity that the LTIP ceased to be of any force and effect upon Matthews’ resignation or termination:

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. 

Although stronger language was used elsewhere in the agreement that contemplated non-inclusion in severance pay, the Court of Appeal found that the above provision was sufficient to extinguish the entitlements on its own. This seems at odds with previous decisions which have held that the termination contemplated will be assumed to be lawful termination, making the effective date of termination of employment the end of the notice period. Further, cases that have been found to successfully extinguish such entitlements have generally involved agreements that specifically address the possibility of payment during the notice period. Here, the Court seems to have relied on the specific reference to termination without cause in holding that employment ends before the notice period for the purpose of the agreement. On its face, this contradicts previous Canadian decisions.

The inconsistent interpretation of bonus and incentive agreements by Canadian courts can have significant consequences – in this case, the difference will be worth over $1,000,000. Hopefully, the Supreme Court of Canada will be able to provide some clarity. In the meantime, uncertainty reigns.

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