The Pitfalls of Incentive Plans Supreme Court of Canada – Ruling in Matthews v. Ocean Nutrition Canada Inc.

The Supreme Court of Canada provided its reasons today in Matthews, finding that a constructively dismissed employee was entitled to payment under an incentive plan, despite clear wording in the plan that excluded entitlement. Mr. Matthews was one of the original employees of Ocean Nutrition. His compensation included a significant change of control payment, although to be entitled to the payment Matthews had to be a full-time employee. The provisions of the plan included the following:

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 calculations.

A “Realization Event” included Ocean being acquired by another company. The clear intent of the Long Term Incentive Plan was that Matthews must be an active employee at the time of the occurrence of the Realization Event to be entitled to any compensation under the plan.

Approximately ten years into Mr. Matthews’ employment with Ocean, a new Chief Operating Officer was hired. Tension soon developed between Matthews and the new COO. The result of that tension eventually led to Matthews taking the position that he had been constructively dismissed. Some of the changes that led to that allegation included a change in his title, reduction in his work and responsibilities, change in reporting structure and what Matthews viewed as a campaign to marginalize him within the Company. Thirteen months after Matthews resigned due to what he saw as constructive dismissal, Ocean was purchased by another company. That purchase would have been a Realization Event for the purposes of the Long Term Incentive Plan.

In Matthews’ constructive dismissal lawsuit, he sought damages for the loss of pay out under the Long Term Incentive Plan. The trial occurred in Nova Scotia. The trial judge agreed with Matthews that the various changes in his employment constituted constructive dismissal and awarded damages based on a notice period of fifteen months. The trial judge also awarded damages for the loss of pay out under the Long Term Incentive Plan on the basis that if Matthews had remained employment throughout the notice period he would have been employed at the time of the purchase of Ocean, the occurrence of the Realization Event. The damages awarded for the loss of the pay out were significant, $1,086,893.36.

Ocean appealed the trial decision. The majority of the Court of Appeal held that the trial judge erred in awarding damages for the loss of the pay out, pointing to the contractual wording as eliminating any right to the pay out. The majority found that the clear language of the plan deprived Matthews from participating in the pay out.

Matthews appealed to the Supreme Court of Canada. A unanimous court found that the Court of Appeal was in error. The error arose when the Court of Appeal failed to focus on what damages Matthews was entitled to as a result of Ocean’s failing to provide reasonable notice, rather focusing on whether the terms of the plan were plain and unambiguous.  The Court confirmed the two-part test established by the Ontario Court of Appeal to determine appropriate damages for breach of the implied term to provide reasonable notice. That test is as follows:

1. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?

• If so, do the terms of the employment contract or bonus plan unambiguously remove or limit that common law right?

As the Realization Event would have occurred during the period of notice, the Court found that Matthews was entitled to the pay out. In holding that the contractual terms were not sufficient to unambiguously remove or limit Matthews’ common law right to the pay out, the Court noted the following:

• The contractual term that required him to be “full time” or “active” was not sufficient as had proper notice been provided Matthews would have been a full time or active employee.

• The contractual term eliminating entitlement to the pay out on termination was not sufficient as Matthews’ termination was unlawful and to be sufficient to eliminate the common law right the exclusionary clause must clearly cover the exact circumstances which have arisen. The Court stated that termination without cause is not the same thing as termination without notice.

• The contractual term removing entitlement from severance was not sufficient because there is a difference between severance and damages. Matthews’ entitlement to the pay out arose because of his entitlement to damages, which was not specifically excluded.

• The contractual term relating to no current or future value did not operate to exclude entitlement because the Realization Event occurred during the period of notice.

This decision demonstrates how strictly Courts will scrutinize agreements. It is only if the agreement is absolutely clear and unambiguous and contemplates the exact situation that is before the court that an exclusionary clause will operate to exclude payment which otherwise would have been earned during the period of notice.

This update was authored by Rose Keith, QC. Looking for more information on similar issues? Contact Rose at rkeith@harpergrey.com or anyone else listed on the authors page.