The Supreme Court just released a decision on Friday in which it unanimously upheld a constructively dismissed employee’s entitlement to an incentive bonus payment over the course of his notice period.
Mr. Matthews, a chemist by background, was a senior executive with Ocean Nutrition, and was a part of the company’s long-term incentive plan (“LTIP”), which entitled him to payment in the event of a “realization event” such as the sale of the company.
In 2011, a change in management caused Matthews to experience a large reduction to his duties. On this basis, he claimed constructive dismissal and resigned from the company in 2011, after 14 years of service. Approximately one year after his departure, Ocean Nutrition was sold for $540 million, which would have triggered a payment of $1.1 million to Mr. Matthews had he remained with the company.
At trial, the courts agreed that Mr. Matthews was constructively dismissed, awarding him 15 months of notice and entitlement to the LTIP. The company appealed the decision and the Court of Appeal decided that Mr. Matthews was not entitled to his bonus entitlement based on exclusion language in the LTIP Plan i.e. the incentive plan agreement was of no force or effect once Mr. Matthews’ employment with Ocean ceased.
In its recent ruling, the Supreme Court clarified that an employer is responsible for damages for failing to provide reasonable notice in a wrongful dismissal case, not simply pay in lieu of reasonable notice. It also confirmed that in determining contractual damages such as bonuses upon wrongful or constructive dismissal, the correct approach is a two-step inquiry:
- Would the employee have been entitled to the payment during the reasonable notice period if he or she was not terminated?
- If the answer to #1 is yes –the question is do the terms of the Agreement remove the employee’s common law rights in a clear and unambiguous manner?
In particular, the Court stressed that terms that limit an employee’s common law rights to damages need to be absolutely clear and unambiguous. The Court also reiterated that for the purpose of calculating wrongful dismissal damages, the employment contract is not treated as “terminated” until after the reasonable notice period expires.
In its decision, the Supreme Court overturned the Court of Appeal’s decision and awarded Mr. Matthews his bonus entitlements under the LTIP.
The case has far reaching consequences for both employers and employees who have clauses surrounding bonus structures and commissions, often seen in both Sales and Executive level compensation packages. Following this case, it is likely that much of the language around these clauses will need to be revised.