Supreme Court Clarifies Damages Analysis for Incentive Related Compensation Written By: Breanne Schroter, Student Taylor Holland, Associate On October 9, 2020, the Supreme Court of Canada (“SCC”) released the decision of Matthews v Ocean Nutrition Canada Ltd., 2020 SCC 26, which has a significant impact on the enforceability of employee stock option plans and long term incentive plans moving forward. The Appellant, David Matthews (“Matthews”), was employed by Ocean Nutrition Canada Ltd. (“Ocean”) as a senior chemist occupying many senior management roles over his time with Ocean. Matthews, by virtue of his status as a senior executive, was subject to Ocean’s long-term incentive plain (the “LTIP”), the purpose of which was to reward employees for past contributions and incentivise employees to continually contribute to the success of the company. Under the LTIP, employees would receive a bonus if the “Realization Event” occurred, which definition included the sale of the company. In 2007, Ocean’s COO began to limit Matthews’ job responsibilities, and actively misled him about his future and position with the company. In 2011, Matthews left Ocean as a result of the ongoing mistreatment. Thirteen months later, Ocean sold for $540 million, which triggered the “Realization Event” under Ocean’s LTIP. Matthews’ contractual entitlement under the LTIP amounted to $1.1 million. Ocean took the position Matthews was not entitled to the bonus since he was not an “active employee” at the time of sale. Matthews commenced a constructive dismissal action which included a claim for damages pursuant to the LTIP. Lower Courts Both the Nova Scotia Supreme Court and Nova Scotia Court of Appeal held that Matthews was entitled to a common law reasonable notice period of 15 months. However, the lower courts diverged with respect to their determinations as to whether Matthews was entitled to a bonus under the LTIP. The trial judge held that, but for Matthews being constructively dismissed, he would have been an employee when the company was sold. Since the LTIP did not unambiguously limit or remove his common law entitlement, he was awarded damages equivalent to what he would have received under the LTIP. In contrast, the Court of Appeal held that Matthews was not entitled to damages for the LTIP interpreting the LTIP to unambiguously limit his right to claim damages. SCC The SCC unanimously held that the Nova Scotia Court of Appeal erred in its analysis by first considering whether the terms of the LTIP were clear and unambiguous, instead of first considering whether the LTIP was included in the damages owed to Matthews for reasonable notice. The SCC held that Matthews was entitled to damages for his entire remuneration, including the LTIP, which he would have earned during the 15-month reasonable notice period. In reaching this conclusion, the SCC affirmed the two-part test established by the Ontario Court of Appeal in Paquette v TeraGo Networks Inc, 2016 ONCA 61. This two-part test considers: 1. Whether, but for the termination, the employee would have been entitled to receive the bonus during the reasonable notice period; and, 2. Whether, the wording of the bonus plan clearly excludes the employee’s common law entitlement. Accordingly, in determining whether a bonus payment is included in the quantum of damages for wrongful or constructive dismissal, two questions should be asked. First, a court must consider whether, but for the termination, the employee would have been entitled to the bonus within the period of reasonable notice. Second, a court must determine whether the employee’s common law rights have been unambiguously limited or removed by the wording of the bonus plan or employment contract. In applying this test, the SCC held that the LTIP formed part of Matthews’ compensation since the sale of Ocean occurred during the 15-month reasonable notice period. In making this determination, the SCC stated there was no need to consider whether the LTIP was integral to his compensation. However, the “integral” test may be applicable where there is doubt whether the bonus would have been payable during the reasonable notice period, as may be the case where the bonus is discretionary. In reference to the second question, in order to limit or remove the employee’s common law rights, the exclusion clause must cover the exact circumstances of the termination. The language of the LTIP did not suffice to limit or remove Matthews’ common law rights, as the requirement that the employee be “full-time” or “active” was not sufficiently clear or unambiguous. Moreover, the SCC further confirmed that language referring to “termination with or without cause” is not analogous to termination without notice. Termination will only occur at the end of the notice period if an employee is dismissed wrongfully or constructively. In any event, the SCC was clear that an exclusion clause must provide for the exact circumstances of the termination in order to limit an employee’s right to claim damages. Lastly, the SCC indicated it may also be appropriate to consider whether an employee was aware of the existence of the clause purporting to limit or remove their common law rights. Takeaway Employers should be stringently reviewing the terms of their current bonus plans and LTIPs to determine whether unambiguous language is used in the exclusion clauses. Going forward, if the language in an exclusion clause does not capture the exact circumstances of the cessation of employment, an employer will run the risk of damages owing under the bonus plan or LTIP. In addition, employers should encourage employees to review the terms of any bonus plan or LTIP with legal counsel to ensure the terms of the exclusion clause are brought to the employee’s attention. Disclaimer: This article is to be used for educational and non-commercial purposes only. Parlee McLaws LLP does not intend for this article to be a source of legal advice. Please seek the advice of a lawyer before choosing to act on any of the information contained in this article.