Canadian Employment Law Today

Canadian HR Reporter, 2021 4 Supreme Court clarifies test for bonus damages and addresses employer obligations of good faith in Nova Scotia case A reasonable notice bonus IN Matthews v. Ocean Nutrition Canada Ltd., the Supreme Court of Canada clarified the legal principles applicable to a dismissed employee's entitlement to bonus money during the reasonable notice period. Sec - ondly, the court addressed the nature of an employer's obligations of honesty and good faith, signalling that these duties will continue to evolve. David Matthews, a chemist and senior manager, was a valuable contributor to Ocean Nutrition's business from the com - mencement of employment in 1997. In 2007, Ocean hired a new chief operating officer who did not like Matthews. His ani- mosity resulted in a four-year "campaign" to marginalize Matthews. He eroded his responsibilities and lied to him about his future in the company. In June 2011, as a result of Ocean's conduct, Matthews re - signed to accept employment with a new employer. Thirteen months later, Ocean was sold for $540 million. Had Matthews remained employed by Ocean, he would have been entitled to a $1-million bonus under Ocean's Long Term Incentive Plan (LTIP). Matthews brought an action for con - structive dismissal. He claimed damages for the compensation he would have re- ceived during the reasonable notice period owed to him, including the LTIP bonus, less mitigation income. He sought a decla- ration that Ocean acted contrary to its con- tractual "duty of good faith" and punitive damages in relation to that alleged breach. Lower court decisions At trial, Matthews successfully proved he was constructively dismissed. The erosion of his responsibilities and Ocean's margin- alizing course of conduct satisfied the test for constructive dismissal, established in Potter v. New Brunswick Legal Aid Services Commission. He was entitled to a reasonable notice period of 15 months. Since Ocean's sale fell within the reasonable notice peri - od, Matthews was awarded the value of the LTIP bonus. "Bad faith" damages were not awarded, despite the trial judge's findings of dishon - est conduct by Ocean. This was due, in part, to Matthews' failure to lead evidence of mental distress in relation to bad-faith conduct. Further, the trial judge found that Ocean's conduct was not designed to avoid the LTIP bonus. Punitive damages were, therefore, inappropriate, said the trial judge. Nova Scotia's Court of Appeal upheld the finding of constructive dismissal but disagreed that Matthews was entitled to the bonus. According to the court, the LTIP clearly foreclosed any entitlement to the bonus the moment Matthews left the company. Further, the LTIP was clear that it had no value for the purpose of calculating "severance." Supreme Court decision In a unanimous decision, the Supreme Court overturned the Nova Scotia Court of Appeal. The top court did not reconsider whether Matthews was constructively dismissed or his entitlement to reasonable notice. The million-dollar question, literally, was his entitlement to the LTIP bonus during the 15-month notice period and the legal basis for awarding it. Matthews' counsel asserted that his entitlement flowed either from Ocean's breach of its obligation to provide reasonable notice of termination or its bad-faith conduct that forced him out of the business. Reasonable notice To determine whether an employee is en - titled to bonus compensation during a rea- sonable notice period, the following test applies: • If reasonable notice was provided, would the employee have earned the bonus? • Are there contractual terms that unam- biguously remove the right to receive the bonus during the notice period? The answer to the first question was yes. Had Matthews been provided 15 months' reasonable notice, he would have been em- ployed by Ocean on the date of the sale and entitled to the LTIP bonus. On the second question, the Supreme Court overturned the Court of Appeal and answered no. The LTIP contained two potential restric - tions to prevent recovery of the bonus dur- ing the reasonable notice period. First, the plan required Matthews to be a "full time employee" on the date of the sale. Second, the plan provided that the LTIP bonus and its future value could not be taken into ac - count for the purpose of calculating sever- ance entitlements. The court held that neither restriction prevented Matthews from recovering the LTIP bonus. The fact that Matthews was not entitled to the LTIP itself because his employment terminated before it crystallized was irrel - evant. What mattered was that he was en- titled to the value of the LTIP as damages because it represented a foreseeable loss based on the failure to provide reasonable notice. To deny Matthews the LTIP incen- tive, Ocean needed to clearly and unam- biguously specify in the contract that the bonus would not form part of his entitle- ment to compensation during the reason- able notice period. It did not do so. The contractual provision providing that the LTIP bonus had no value for the pur- pose of calculating Matthews' severance en- titlement also did not aid Ocean. Although "severance" is often used interchangeably with "payment in lieu of notice," the terms are, in law, technically distinct. Severance is a statutory concept intended to compen - sate employees with a lump-sum payment for long service. Reasonable notice, while encompassing severance obligations, re- quires employers to provide appropriate notice of termination while continuing all forms of compensation during the notice period that are not expressly excluded by contract (subject to statutory minimum re - quirements). As noted, the incentive plan in question did not validly exclude the LTIP bonus from Matthews' entitlement to rea- sonable notice. In the end, based on established prin- ciples of wrongful dismissal, Matthews was entitled to the LTIP bonus that fell within the period of his reasonable notice entitle- ment. CASE IN POINT: REASONABLE NOTICE Subject to contractual restrictions, an employer is required to provide employees with reasonable notice of termination. Failing that, or in the event of a constructive dismissal, an employee may sue to recover the compensation that would have been paid during the period of reasonable notice. In many cases, the question of whether an employee is entitled to certain bonus payments has been argued over. The Supreme Court of Canada recently clarified how bonuses should be treated in relation to reasonable notice entitlements, along with the duty of good faith on both sides. BACKGROUND BY RISHI BANDHU

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