Decision will affect ‘virtually every executive’ and many employees bonuses, other benefits
A chemist deemed to have been constructively dismissed is entitled to receive the benefit he would have received when the company he worked for was sold under his notice period, the Supreme Court ruled on Friday.
In Matthews v. Ocean Nutrition Canada Ltd., a unanimous Supreme Court found that the appellant, who worked for about 14 years for the respondent, had not been given sufficient notice when he was constructively dismissed from his executive position with Ocean Nutrition.
A benefit the appellant had enjoyed was a long-term incentive plan, under which a “realization event” such as the sale of the company would trigger payments to employees who qualified under the plan. Had the appellant stayed with the company, he would have been entitled to $1.1 million from the sale of the company. In Friday’s decision, which upheld that of the Nova Scotia trail judge, the appellant will receive that benefit, plus interest owing and costs throughout.
“It’s a very happy decision … for employees across Canada,” says Howard Levitt, senior partner at Levitt LLP in Toronto who represented the successful appellant before the Supreme Court.
The decision “has made it virtually impossible to contract out of benefits that would have accrued during a period of notice if an employee's wrongfully dismissed,” says Levitt. This will affect “virtually every executive” and a large percentage of Canadian employees, many of whom enjoy bonuses, stock options or LTIPs.
“I would say that employees [who] have such contracts, now those contracts are simply not enforceable.”
The appellant, David Matthews, “is one of a handful of individuals in the world with the skills needed to run a large-scale omega-3 facility,” wrote Justice Nicholas Kasirer for the panel of seven judges. Matthews worked for one such facility, Ocean Nutrition Canada (or its predecessors) from January 1997 to June 2011. When he resigned from Ocean Nutrition he sued for wrongful dismissal, seeking damages for breach of his employment contract and the loss of an LTIP with the company. The appellant’s role within the company had been diminished by a new COO years several years previously.
The LTIP provided for a portion of the proceeds of the sale of the company, if it occurred during Matthews’ period of employment, to be paid to him based on a formula provided in the plan. The LTIP further indicated that if Matthews was not employed by the company at the time of the sale he would not be entitled to share in the proceeds, whether the end of employment was via resignation or wrongful dismissal. Ocean Nutrition was sold to a Dutch company, Royal DSM N.V., in July 2012, or 13 months after Matthews had left.
The trial judge at the Supreme Court of Nova Scotia found that Matthews had been constructively dismissed, and that the appropriate notice period was 15 months. He was awarded damages of approximately $1.085 million, mostly related to the LTIP, which the trial judge found would have crystalized if Matthews had remained employed throughout the notice period.
A majority of the Court of Appeal upheld the finding of constructive dismissal with a reasonable notice period of 15 months, but held that the trial judge erred in awarding damages pursuant to the LTIP, because the plan, by its plain wording, precluded any such payment. Justice Scanlan, in dissent, would have dismissed the appeal and maintained the award pursuant to the LTIP.
On the issue of constructive dismissal, Justice Kasirer noted that although employers have the right to require employees to leave there is always the duty to give reasonable notice, and failure to provide such notice can lead to an award of damages, including benefits and bonuses had they been given reasonable notice. Even if an employee was not actually working for the employer at the relevant time but the notice period is active, the period of the employment contract stays alive for the purpose of calculating damages.
Breach of good faith would have been considered a separate or distinct failure, and the court referred to Ocean Nutrition’s “clear dishonest behaviour”; but given that this appeal could be resolved on settled law issues on the concept of reasonable notice, the court did not look at the bad faith argument.
“This is a dismissal case,” wrote Justice Kasirer for the court. “In light of the comment in Bhasin … that the common law should develop in an incremental fashion, I would decline to decide whether a broader duty exists during the life of the employment contract in the absence of an appropriate factual record.”
The court confirmed that pursuant to Bhasin v. Hrynew, 2014 SCC 71, “the common law should develop in an incremental fashion. For that reason, it declined to decide ‘whether a broader duty [of good faith] exists during the life of the employment contract in the absence of an appropriate factual record,’” Nancy Barteaux, counsel for the respondent Ocean Nutrition, told Canadian Lawyer in a written statement.
“There has been an abundance of employment law litigation regarding good faith principles since the release of the Supreme Court of Canada’s decision in Bhasin. Matthews does not settle this area of law and in fact may lead to increased litigation.”
The court reinforced the implied contractual obligation in good faith and fair dealing in the manner of dismissal, says Stacey Ball of Ball Professional Corporation in Toronto and counsel for the intervener Canadian Association for Non-Organized Employees; but without an appropriate factual record, “there’s a significant debate here to be decided over a period of the next 10 years.”
The court also acknowledged that the obligation of employer good faith and fair dealing exists “not at the precise moment of dismissal, but it can go back many months,” says Ball.
And the court clarified that an employer is responsible for damages for not giving reasonable notice in a wrongful dismissal case, not simply pay in lieu of reasonable notice.
The Supreme Court had previously noted that employers are responsible for pay in lieu of notice, says Ball, but in this case “made it very clear” that the employer is responsible for damages. These can be much broader and include, for example, long-term disability insurance benefits that can continue for many years.
Regarding the contractual clarity of the LTIP, “For employers, this decision is a reminder to use clear language in every agreement with an employee,” Barteaux wrote.
“In Matthews, the use of the word ‘severance”, intended by the employer to limit entitlement to the LTIP during the notice period, was not sufficient to clearly limit this entitlement. ‘Severance’ is a word many employers and employees use colloquially to describe common law notice entitlements. However, the Supreme Court of Canada has affirmed that ‘severance’ is a distinct concept from wrongful dismissal damages.”
The decision “covers a lot if employment law,” Ball adds; “it’s a very important employment case because it reaffirms a lot of principles … and clarifies a few principles, … but it also leaves a big issue on the judicial agenda for the next 10 years.”