Labour and Employment Law Blog

Today, the SCC handed down an important decision for employers in Matthews v. Ocean Nutrition Canada Limited. There are at least three significant implications of this case in which the SCC sought to clarify the remedies available to employees on termination without cause:

1. An employer has a common law duty to provide reasonable notice of dismissal. This is an independent obligation which does not turn on the presence or absence of good faith. A failure to provide reasonable notice leads to an award of damages in lieu.
2. A breach of the duty to exercise good faith in the manner of dismissal is a distinct contractual breach, and its damages are calculated differently. It answers for foreseeable injury resulting from callous or insensitive conduct in the manner of dismissal. In a constructive dismissal, the conduct under scrutiny may be extended.
3. If an employee would have been entitled to a bonus or benefit as part of their compensation during the reasonable notice period, the terms of the employment contract or bonus plan must unambiguously take away or limit that common law right. It is clear the SCC will take a very strict approach to determining ambiguity and resolve any doubt in favour of the employee.

We briefly outline the practical implications of the Court’s decision on each issue following the case background below.

Factual Background

David Matthews was a senior executive for Ocean Nutrition Canada Limited (“ONC”) and its predecessor companies from January 1997 until his resignation on June 24, 2011. He was a highly respected chemist with particular expertise.

Mr. Matthews alleged that he had been pushed out of his position due to reassignments of his job function that amounted to constructive dismissal. Indeed, the Court found a new CEO began a campaign to marginalize Mr. Matthews, limiting his responsibilities and lying about his status and prospects.

He further alleged that his constructive dismissal was motivated by the company’s desire to avoid paying out his entitlements under a Long Term Incentive Plan (the “LTIP”). Mr. Matthews had been the longest-serving employee under the LTIP and, due to a sale of the company which was a “Realization Event,” he would have been entitled to a payout of approximately $1.1M had he remained an employee 13 months after he departed. The lower Court determined his notice period was 15 months.

ONC took the position that the terms of the LTIP limited or removed Mr. Matthews’ right to payment on the basis of the following provisions:

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 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.

The [LTIP bonus] 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 calculation.

While Mr. Matthews alleged a breach of bad faith by ONC and pointed to the anxiety caused by ONC’s treatment of him, he made no request for damages for mental distress.

SCC Decision and Case History

Today’s decision set aside the Nova Scotia Court of Appeal’s judgment and restored the trial judgment. The SCC took the opportunity to clarify fundamental legal principles behind the common law duties on employers to act in good faith and provide employees reasonable notice of dismissal, absent cause.

Key Takeaways for Employers

In this case, ONC failed to provide reasonable notice. The SCC found Mr. Matthews should be paid the LTIP benefits realized during his reasonable notice period because he would have been entitled to them had he been given legal notice. The provisions of the LTIP were not clear enough to extinguish this entitlement.

Damages for Failing to Provide Reasonable Notice

The SCC clarified that employers have a right to terminate employees. To do so, absent cause, an employer must provide reasonable notice. It is the failure to provide reasonable notice, not the termination itself, which is a breach and leads to an award of damages.

For the purposes of calculating wrongful dismissal damages the first question is what, but for the termination, would have been the employee’s entitlements (including bonus or benefits) during the reasonable notice period. From there, courts should determine whether the terms of the employment contract or bonus plan unambiguously take away or limit that common law right. This approach also fits constructive dismissals. The SCC noted that damages for wrongful dismissal are not based on the manner of dismissal.

The case did not address, nor should it affect the enforcement of legal termination provisions.

Challenges in Limiting Liability for Bonuses and Incentive Plans

It is clear the SCC will take a very strict approach in its application of any contractual provision limiting an employee’s common law rights. The SCC reinforced the principle that any ambiguity should be resolved in favour of the employee.

It is common for employers to want to have terms excluding employees from incentive and bonus payments if they are no longer actively employed. In respect of ONC’s LTIP which sought to do this, the SCC held that language requiring an employee to be “full-time” or “active” at the time of the triggering event was not sufficiently clear to remove Mr. Matthews’ common law right to damages. This was because, had the employee received proper notice, he would still have been employed full-time during the reasonable notice period. Further, the SCC found the reference to “termination without cause” in an exclusion clause does not cover “termination without notice.”

Employers will be challenged to ensure these sorts of contractual provisions “clearly cover the exact circumstances which have arisen”. Clauses which remove an employee’s right to damages in the event the employee is terminated “with or without cause” and even in the event of “an unlawful termination” are subject to ambiguity in interpretation and therefore may not extinguish employee entitlements.

Employers should revisit any similar exclusionary provisions in their bonus, incentive or similar plans.

Damages for Breach of Duty to Act in Good Faith

The Supreme Court clarified that a violation of the duty of good faith is itself a distinct contractual breach which is separate from an employer’s failure to provide reasonable notice. An employer’s failure to act in good faith in the course of a termination can also expose it to damages.

At the SCC, Mr. Matthews stressed his anxiety caused by ONC but made no request for damages for mental distress. Thus, the SCC did not deal substantively with the determination of damages for breach of the duty of good faith. It clarified that an employee cannot obtain double recovery and noted the nature of the breach of good faith is of a different order than wrongful dismissal. Further, while Mr. Matthews originally claimed for punitive damages at trial, he did not pursue it on appeal.

As a result, this case does not assist much with the question of how to quantify damages for breach of the duty of good faith. Considering the law established in previous cases such as Bhasin, it remains open to employees to claim compensation for foreseeable injury arising from the employer’s conduct. This could include mental distress, which will probably require quantification for the Court to assess damages.

Had Mr. Matthews tendered evidence of his mental distress, the Court’s comments suggest it would have entertained a claim for damages. Instead, Mr. Matthews sought a declaration regarding ONC’s treatment of him. The SCC declined to make a formal declaration, however, it took the opportunity to observe that Mr. Matthews was mistreated and lied to about the security of his future with the company in the years leading up to his constructive dismissal in a manner that contributed to making his job intolerable.

Employers should be alive to the Courts’ willingness to contemplate these types of damage claims and the prospect that employees may raise them more often in the future.