Pound v. iWave, 2017 PECA 17, a recent decision by the Prince Edward Island Court of Appeal, is a cautionary tale for employers about the legal issues that may arise when standard form employment policies are adopted without management fully understanding their obligations to employees in practice.read more
Employee Bonuses After Dismissal: When Are They Owed?
The Nova Scotia Supreme Court in Matthews v. Ocean Nutrition Canada Ltd., 2017 NSSC 16 (with supplemental reasons at 2017 NSSC 123) recently set out the test in Nova Scotia for determining whether an employee dismissed without cause is entitled to damages for lost future bonuses. The key consideration, not surprisingly, is the employee’s contract. As such, employers need to consider the lessons from this case prior to any new employment relationship in which a bonus forms an integral part of the employee’s contract.
The employee, Mr. Matthews, was a chemist who started working for a predecessor of Ocean Nutrition Canada Limited (“ONC”) in 1997. In 2007, Mr. Matthews and ONC signed an Executive Incentive Agreement, referred to internally as the Long-term Incentive Program (“LTIP”). Under the LTIP, Mr. Matthews was entitled to a sizable payout in the event of a sale of ONC. Also, Mr. Matthews was a participant in ONC’s Short-Term Incentive Program (“STIP”), an annual discretionary bonus.
Mr. Matthews resigned in June, 2011, but claimed constructively dismissal (a form of dismissal without cause) as a result of an overall diminishment of his role. For example, a major part of his portfolio was reassigned to another ONC employee. Mr. Matthews submitted that his damages for constructive dismissal should include compensation for the loss of payouts under the LTIP and STIP that he would have otherwise received over a reasonable notice period.
After a lengthy analysis, the Court found that Mr. Matthews was constructively dismissed. As such, Mr. Matthews was entitled to pay in lieu of reasonable notice. The Court, relying on the customary factors for assessing reasonable notice, found that Mr. Matthews was entitled to a notice period of 15 months’ pay as he had worked for ONC for 14 years, possessed highly specialized technical knowledge and abilities, and was 50 years old. The most interesting aspect of the case, however, is the Court’s analysis of Mr. Matthews’ bonus entitlements.
The Court adopted the test from recent companion decisions of the Ontario Court of Appeal in Paquette v. TeraGo Networks Inc., 2016 ONCA 618 and Lin v. Ontario Teachers’ Pension Plan Board, 2016 ONCA 619. An employee dismissed without cause is entitled to compensation for a lost bonus over the reasonable notice period if the following are satisfied:
- The bonus was an integral part of the terminated employee’s compensation, and the employee would have been eligible to receive the bonus had the employee continued to be employed during the reasonable notice period; and
- The bonus plan does not contain wording that would specifically remove the employee’s common law entitlement. To meet this criteria, the wording of the plan must unambiguously alter or remove the employee’s common law rights.
ONC argued that the language in the LTIP and STIP expressly removed Mr. Matthews’ common law entitlement. More specifically, both the LTIP and STIP required that the employee be a full-time employee, and the LTIP in fact stated:
ONC shall have no obligation under this Agreement to the Employee unless on the date of a Realization Event the Employee is a full-time employee of ONC. For greater certainty, this Agreement shall be of no force or effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.
The Court, however, held that this language was not sufficient to remove Mr. Matthews’ common law rights. In particular, had Mr. Matthews not been constructively dismissed, he would have been a full-time employee during the reasonable notice period when the LTIP and STIP payouts were made. Further, while ONC argued that the reference to termination “without cause” in the LTIP clearly meant that any common law right to notice would not apply, the Court held that “[t]ermination without cause does not imply termination without notice.” Essentially, while the exclusion provision unambiguously applied to employees terminated without cause, the contract did not clearly exclude the reasonable notice period from the time in which the employee is considered a full-time employee. So, the exclusion clause applied to Mr. Matthews as an employee terminated without cause, but only after the reasonable notice period of 15 months expired. As a result of this ambiguous language, Mr. Matthews was awarded $1,151,018.36 in compensation for bonuses he would have otherwise received over the notice period.
What This Means for Employers
This decision reinforces the importance of clear, well-drafted employment contracts. The termination of the employment relationship is typically not on either parties’ mind when hiring or offering a bonus, but as shown here, it needs to be fully considered at that time. Unless there is unambiguous language limiting an employee’s entitlement to bonuses on termination of employment, the employer may be unnecessarily exposed. The Court may award an employee damages for any bonus entitlements arising after the date of termination but during the period of reasonable notice.
Cox & Palmer’s Employment and Labour Group is available to provide assistance drafting employment contracts, or to provide advice regarding dismissals.