On October 9, 2020, the Supreme Court of Canada issued its decision in Matthews v. Ocean Nutrition Canada Ltd. The Court clarified the calculation of damages during the reasonable notice period arising out of a long term incentive plan that appeared to take away a terminated employee's entitlement. The Court also provided expanded guidance on what the duty of good faith in the manner of dismissal involves.

Background Facts

M was employed as a chemist and senior executive. In 2007, the company hired a new Chief Operating Officer to whom M reported. For the next  four years, the COO embarked on a "campaign" to marginalize M in the company. This course of conduct included repeated incidents of dishonesty by the COO towards M, and that went beyond limiting M's responsibilities. Eventually, M had enough and left the company. Approximately one year later, the company was sold.

M sued the company for constructive dismissal and claimed damages for lost participation in the company's Long-Term Incentive Plan. Under the Plan, a "realization event," such as the sale of the company, would trigger the payment of a specified share of the sale proceeds to current full-time employees of the company. Under the Plan, an employee needed to be actively employed during the realization event to receive payment.  Further, the Plan would be of no force or effect if the employee ceased to be an employee, regardless of whether the employee resigned or was terminated with or without cause. It also stated that the LTIP payment should not be part of M's compensation for any purposes including in connection with any severance calculation. 

The trial judge held that M was constructively dismissed and set the notice period at 15 months. The trial judge awarded M the value he would have received under the Plan ($1.086 million), but for the constructive dismissal. In coming to that finding, the trial judge held that the terms of the Plan did not unambiguously limit or remove M's common law right to damages.

On appeal, the Court of Appeal unanimously agreed that M had been constructively dismissed and was entitled to 15-months' notice. However, the majority of the Court determined that the terms of the Plan were unambiguous and precluded any recovery by M. The dissenting justice would have permitted M to recover under the Plan based on a finding that the company breached the duty of good faith and fair dealing implied in the Plan and employment contract. 

Supreme Court's Decision

The unanimous decision of the Supreme Court confirmed  that there are two distinct contractual breaches that may arise from a dismissal:

  • the failure to provide reasonable notice; and
  • the failure to exercise good faith in the manner of dismissal.

Failure to Provide Reasonable Notice

The Court confirmed that while employers have the right to terminate employees, employers must provide reasonable notice if they do not have cause. Where reasonable notice is not provided, it amounts to a breach of the employment contract and leads to an award of damages.

The Court confirmed that the remedy for a breach of the implied term to provide reasonable notice is an award of damages based on the period of notice an employee should have been given, with damages representing compensation for the income, benefits and bonuses an employee would have received had the employer provided reasonable notice. The Court clarified that this remedy is different and distinct from payment in lieu of notice.

The Court also provided welcome clarity on the question of whether damages for the failure to provide reasonable notice include bonus payments or other benefits. The Court advised that the following two-stage legal test should be applied to determine the quantum of damages where bonuses or benefits are concerned:

  1. Would the employee have been entitled to the bonus or benefit as part of his compensation during the reasonable notice period?
  2. If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?

The Court said that an "active employment" requirement, or clause that purports to remove an employee's common law right to damages upon termination "with or without cause" in an employment contract or bonus plan, is not sufficient to limit an employee's common law right to damages. On this basis, the Court found that the Plan did not remove Matthews' common law right to receive damages equal to his bonus payment and was thus conclusive of the issues on appeal.

The Duty of Good Faith and Honest Conduct

The Court also commented on the duty of good faith, confirming that a violation of this duty is a distinct contractual breach that is separate from an employer's failure to provide reasonable notice and may expose an employer to damages.

According to the Court, the duty to exercise good faith "in the manner of dismissal" does not refer only to conduct at the moment of dismissal. "In the manner of dismissal" encompasses misconduct occurring prior to dismissal, so long as the misconduct was a component of the dismissal.

To that end, the Court mentioned that a breach of the duty of good faith during the course of the employment relationship may result in damages for breaches of "non-monetary benefits" or injury to an employee's self-worth related to their employment but declined to comment on how such damages may be quantified.

Takeaways for Employers

Contractual provisions that limit an employee's common law rights upon termination will likely be subject to increased scrutiny following this decision. The Court has reinforced the principle that any ambiguities should be resolved in favour of the employee.

Businesses should revisit exclusionary provisions in their bonus, incentive or similar plans to ensure that the language is absolutely clear and unambiguous if they intend to contract out of employees' benefits entitlements during their reasonable notice period.

Businesses should ensure they adhere to the duties of good faith and honest performance during the course of an employment relationship and not just at the time of dismissal. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.