Constructive Dismissal and Bonus Payments

November 30, 2020

By Brian Babcock

A senior executive who is constructively dismissed is entitled to a bonus he would have earned during a period of reasonable notice, the Supreme Court of Canada has confirmed. Other portions of their ruling may also increase payments to departing employees. Some issues are left open for future cases, increasing uncertainty.

In Matthews v. Ocean Nutrition Canada Ltd., the Plaintiff had been a long term employee of the company, holding a series of senior positions. His compensation package included belonging to a “Long Term Incentive Plan” (LTIP) designed to retain executives. Various triggering events, including the sale of the company, would entitle him to a substantial payment. In 2007, a new Chief Operating Officer was hired. Matthews became marginalized within the company after this.  He stayed with the company because he expected that it would be sold, and he wanted the LTIP payment. Finally in 2011, he could stand it no longer and quit. He took other employment.

He sued for constructive dismissal, sometimes referred to as “quitting for cause”. He was awarded an amount equivalent to 15 months in lieu of reasonable notice of dismissal.

The company was sold 13 moths after he quit. The trial judge awarded him an amount equal to the LTIP payment he would have received if he was still with the company. The Court of Appeal upheld the dismissal amount, but disallowed the LTIP amount on the basis that the Plan required employees to be employed at the time of the triggering event.  The LTIP said that even if the departure was due to termination without cause, the payment was no longer due.

Off they went to the Supreme Court where the trial judgment was restored. The Court held that in determining whether a bonus is payable after dismissal, there are only two questions:

  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?

It might seem that the answer to the second question ought to be that the LTIP did take away the right.  However, the Court decided, that for the purposes of calculating damages, the contract is not treated as terminated until the end of the period of reasonable notice. Thus, the language of the LTIP about termination did not apply to prevent payment, since Matthews was to be treated as if he was still an employee on the eligibility date.

The LTIP also contained a provision under which the amounts otherwise due under the LTIP were not to be considered “in connection with the Employee’s resignation or in any severance calculation.”

The court focused on the word ‘severance’, pointing out that in law, this word normally refers to amounts due under statutes such as Ontario’s Employment Standards Act, which are not the same as damages for constructive dismissal. On that basis, this language did not help the employer’s position.

The Supreme Court also opened the door to additional damages for a breach of the duty of good faith in performance of a contract. Although they declined to do so in this case, they expressly did not say it could never be awarded. The last line of the judgment is: “…it is not inappropriate to recall that the “non-monetary benefit”…derived from the performance of work can be wrongly taken from employees if, at dismissal, they are lied to or misled as to the reasons for termination.”

Takeaways for employers include:

  • the general rule is that bonuses during the notice period are payable
  • attempts to limit this, like attempts to contractually limit notice, will be very difficult to draft in a way that a court will withhold amounts
  • the willingness of the court to ignore strong language in the LTIP in this case suggests that it might be virtually impossible to contract out of paying these bonuses
  • many existing limits on plans may not be enforceable
  • “severance” is different from damages for wrongful or constructive dismissal
  • mistreatment of employees, whether at the time of dismissal or otherwise, may lead to increased damages
  • increased litigation is likely, so if you wish to avoid that, settlement offers must reflect the increased risks

If you are an employee, you should also be aware of your rights, and consult a lawyer if you are fired, or believe that your treatment at work might be grounds for a claim of constructive dismissal.