Matthews v Ocean Nutrition: Departed employee awarded $1M bonus from company’s sale during notice period

A dismissed employee is entitled to a bonus that vests during their notice period, absent clear contractual language to the contrary.

In Matthews v Ocean Nutrition Ltd, 2020 SCC 26 [Matthews], the Supreme Court of Canada (“SCC”) unanimously awarded an employee a $1 million-plus payout from the sale of his former company. This incentive bonus came due after the employee was constructively dismissed but during what the courts calculated as his reasonable notice period of fifteen months. From the outset, the employee had argued that his employer’s bad faith conduct deprived him of the bonus. Many commentators, including here at TheCourt, speculated that the SCC would take this opportunity to expand the duty of good faith that employers owe employees, which is currently limited to the “manner of dismissal.” However, the Court found that the case could be resolved under existing employment law principles.

Facts and Procedural History

In 1997, David Matthews began working as a senior chemist at Ocean Nutrition Ltd. (“Ocean”), which manufactures Omega-3 acid supplements. In 2007, the company hired a new Chief Operating Officer (“COO”). Matthews’ relationship with Ocean deteriorated over the following years. The COO began a campaign to marginalize Matthews in the company by limiting his responsibilities, misrepresenting his performance to senior management, lying to him about his future employment, and misleading him about plans to sell the business. Matthews continued working at Ocean for as long as he did partly because of a Long-Term Incentive Plan (“LTIP”) that entitled him to a significant bonus if the company was sold. He eventually departed in June 2011 after unsuccessful attempts to negotiate an exit package that would preserve his LTIP rights. Ocean was later sold to a competitor in July 2012, which would have triggered a $1,086,893 payout to Matthews under the LTIP. Ocean took the position that he was not entitled to this bonus because he was no longer an employee. Matthews filed an application seeking damages for constructive dismissal, the value of the LTIP, and punitive damages. He argued that Ocean had acted in bad faith to deprive him of the LTIP payout and that he was entitled to this amount either for the company’s breach of its duty of good faith or through an oppression remedy under the Canada Business Corporations Act, RSC 1985, c C-44.

In Matthews v Ocean Nutrition Canada Ltd, 2017 NSSC 16 and 2017 NSSC 123, Justice LeBlanc found that Matthews was constructively dismissed under either branch of the test from Potter v New Brunswick Legal Aid Services Commission, 2015 SCC 10. Ocean’s ongoing diminishment of Matthews’ role demonstrated that it no longer intended to be bound by the employment contract. Matthews was therefore entitled to a reasonable notice period of fifteen months from his date of departure. Justice LeBlanc awarded Matthews the LTIP value as part of his notice damages because, but-for the constructive dismissal, he would have been a full-time employee when the company was sold. However, while Ocean’s conduct had been dishonest, Matthews had failed to show that the company acted specifically to deprive him of the LTIP. As a result, Justice LeBlanc rejected the claim for punitive damages and held that it was unnecessary to decide the oppression claim.

In Ocean Nutrition Canada Ltd v Matthews, 2018 NSCA 44, the Nova Scotia Court of Appeal allowed Ocean’s appeal in part. The Court concurred that Matthews had been constructively dismissed and that he was entitled to fifteen months’ notice. However, a majority held that he was not entitled to the LTIP payout. The LTIP agreement provided that it was of no force and effect if Matthews ceased to be a full-time employee, “regardless of whether the employee resigns or is terminated, with or without cause.” It further noted that the LTIP “shall not be calculated as part of the employee’s compensation…including in connection with the Employee’s resignation or in any severance calculation.” The majority concluded that this language prevented Matthews from recovering the bonus after he had left the company. Justice Scanlan, dissenting, would have awarded the LTIP payout as damages for Ocean’s bad faith conduct.

Reasonable Notice and Bad Faith Damages are Distinct

Writing for the Court, Justice Kasirer allowed Matthews’ appeal and restored the trial decision. He first explained that an employer’s duty to provide reasonable notice of dismissal is distinct from the duty to exercise good faith in the manner of dismissal. At common law, employers generally have the discretion to terminate an employee without just cause, subject to an implied contractual obligation to provide reasonable notice of that termination. What is “reasonable” will vary for each employee. When an employer fails to provide notice, the employee is entitled to wrongful dismissal damages equivalent to what they would have been paid during their notice period. Importantly, what is “wrongful” is the employer’s failure to provide reasonable notice and not the act of termination itself.

Separately, in Wallace v United Grain Growers Ltd, [1997] 3 SCR 701, the SCC recognized that employers owe employees a duty of good faith in the manner of their dismissal. Honda Canada Inc v Keays, 2008 SCC 39 clarified that damages for breach of this duty do not flow from the normal psychological impacts of termination. Rather, distinct damages (such as for mental distress) require proof of some reasonably foreseeable loss caused by the employer’s bad faith conduct. Later, in Bhasin v Hrynew, 2014 SCC 71 [Bhasin], the Court recognized a “duty of honest performance” that applies to all contracts as an expression of the general principle of good faith. This is “a simple requirement not to lie or mislead the other party about one’s contractual performance” and does not impose a duty of loyalty or disclosure on the parties (Bhasin, para 73). Despite these developments, the SCC has not yet found that employers owe a duty of good faith to employees throughout the entire employment relationship.

Taken together, an aggrieved employee can allege a breach of the duty of honesty in contractual performance, a breach of the duty of good faith in the manner of dismissal, or a breach of the duty to provide reasonable notice. Where the latter obligation is breached, though, this does not render the dismissal in bad faith without further dishonest, misleading, or unduly insensitive conduct. In this case, both the courts and litigants confused these separate heads of damages—possibly in part because Matthews filed his original application before the release of Bhasin.

Presumptive Entitlement to Compensation During Notice Period

In calculating damages for wrongful dismissal, courts will typically award all compensation the employee would have earned had they worked through their notice period. On the question of whether a particular bonus payment is included, Justice Kasirer adopted the two-part test from Paquette v TeraGo Networks Inc, 2016 ONCA 618 [Paquette]:

1. Would the employee have been entitled to the bonus or benefit as part of their 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?

This reflects an understanding that the employment contract continues during the notice period for the purpose of calculating damages—even where that period is determined retroactively, or the employee received pay-in-lieu of working notice. Where a contract is silent on a particular entitlement, courts have often asked whether the bonus or benefit was “integral” to the employee’s compensation. However, Justice Kasirer stated that this inquiry is not necessary where, as here, it is clear that the employee would have received the benefit during their notice period.

The LTIP was a Common Law Employment Benefit

The majority of the Court of Appeal erred by first asking whether the LTIP terms were “plain and unambiguous” instead of what damages were owed for Ocean’s failure to provide Matthews with reasonable notice. On the first step of the Paquette test, Justice Kasirer found that although the parties disagreed about whether the LTIP was integral to Matthews’ compensation, there was no real debate that he would have received the LTIP payout had he been employed through his notice period. At the second step, the contractual language was not sufficiently clear and unambiguous to deprive Matthews of his common-law entitlement, for several reasons.

First, had Matthews received proper notice, he would have been deemed a “full-time employee” at the time of the sale. Second, the exclusion for termination “with or without cause” did not cover Matthews’ unlawful termination without notice. Third, there is a legal difference between severance pay, which compensates employees for long service and is often required by employment standards legislation, and reasonable notice, which protects employees by providing them with an opportunity to seek out alternative employment. Matthews was therefore entitled to any amounts he would have received under the LTIP had he worked through his fifteen-month notice period.

Duty of Good Faith in Employment Unresolved

Since Justice Kasirer awarded Matthews the LTIP value as reasonable notice damages, he found it unnecessary to resolve the other claims. However, he made several comments about the duty of good faith. First, he reaffirmed that the duty of honest performance from Bhasin applies to employment contracts. Second, he left open whether “a duty of good faith will one day bind the employer based on a mutual obligation of loyalty in a non-fiduciary sense during the life of the employment contract” (Matthews, para 85). Third, he suggested that his decision might have been different had Matthews appealed his punitive damages claim or alleged mental distress caused by Ocean’s conduct. Fourth, had it been pleaded, Ocean’s four-year period of dishonesty could have formed part of the “manner of dismissal” in the good-faith analysis.

When an employee alleges bad faith in dismissal, courts can examine the parties’ conduct both before and after the actual termination date. In fact, appellate courts have considered behaviour going back as far as five years in this analysis. One intervenor noted that this approach is problematic because it creates arbitrary distinctions between constructive and standard wrongful dismissals. Where an employee chooses to leave their employment due to intolerable conditions, courts may assess the parties’ conduct throughout several years to determine whether constructive dismissal has occurred. This frequently lengthens the “manner of dismissal” during which the good faith duty applies. In contrast, where an employee elects to remain in employment or the employer actively terminates them, they may have no claim for bad faith conduct that occurred earlier in the employment relationship. In other words, the form of termination often dictates whether or not an employee is protected by the duty of good faith.

Employment Law Takeaways

Although it was a million-dollar dispute, this case confirms the basic approach for calculating reasonable notice damages under any employment contract. The Supreme Court has adopted the Ontario Court of Appeal’s test for determining whether a particular bonus or benefit forms part of an employee’s compensation for this purpose. Generally speaking, it will be difficult to remove an employee’s right to amounts they would have earned during their notice period without explicit contractual language.

Furthermore, consistent with the incremental approach espoused in Bhasin, the Court appears unwilling to expand the duty of good faith in employment contracts without the right facts. This may require an employee to allege distinct damages flowing from an employer’s bad faith conduct during the life of the employment contract rather than in its termination. This may be difficult given, among other barriers, the expanded scope of the manner of dismissal analysis. Without further appellate guidance, this issue will likely continue to frustrate employment lawyers for some time to come.