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December 2020

A Million Dollar Bonus after Constructive Dismissal

Case Study: Matthews V Ocean Nutrition Canada Ltd 1

Howard Borlack
Howard Borlack,
Partner

Jennifer IltonJennifer Ilton,
Law Student

by Howard Borlack and Jennifer Ilton

The Supreme Court of Canada (“the Court”) overturned the decision made by the Nova Scotia Court of Appeal, resulting in an award of one million dollars being afforded to Mr. Matthews, a skilled chemist who was constructively dismissed by his employer, Ocean Nutrition Canada Ltd. (“Ocean”) without reasonable notice.

The trial judge described the four-year period leading up to Mr. Matthews' constructive dismissal as a “campaign to marginalize Mr. Matthews in the company.” This campaign was headed by the hiring of a new Chief Operating Officer. Mr. Matthews was lied to, had his responsibilities arbitrarily reduced, and was excluded from aspects of the business he would not ordinarily be excluded from.

As a senior executive of Ocean, Mr. Matthews was entitled to a Long Term Incentive Plan (“LTIP”) which contractually required Ocean to pay out a bonus upon a “Realization Event,” such as the sale of the company.

Mr. Matthews was constructively dismissed, and 13 months later, the company was sold. He was not given a bonus from the LTIP.

The reasonable notice period Mr. Matthews was owed was accepted to be 15 months. The issue dealt with by the Court was whether the damages owed to him as a result of not having been given notice included compensation for his lost LTIP bonus.

The quantum of damages must include bonuses that would have been paid.

Having established that Mr. Matthews was constructively dismissed, the Court turned their mind to what quantum of damages he should be awarded as a result. The Court held he was entitled to a quantum of damages reflective of the salary, benefits and bonuses he would have earned during the 15 month period since “the employment contract is not treated as terminated until after the reasonable notice period expires.”

The Court took the time to distinguish between severance and damages. Damages account for payment to an employee in lieu of notice that their employment has been terminated. The Court confirmed that there is no implied term that any employer provides pay in lieu of notice. Employers are only required to provide reasonable notice. Severance pay compensates employees for their service and investment in the company they worked for, as well as for the special losses they suffer when their employment is terminated.

In making their decision on whether Mr. Matthews was entitled to receive the bonus as damages, the court relied on the previous decisions in Paquette and Taggart. This reaffirmed the use of a two-step approach to determine whether an employee is entitled to receive a quantum of damages inclusive of bonuses that would have been received during the notice period.

...exclusion provisions must be absolutely clear and unambiguous...

First, courts should consider whether “but for the termination, the employee would have been entitled to the bonus during the reasonable notice period.”2 In the circumstances at hand, this was not a discretionary bonus and would have been paid had he still been employed.

Secondly, the courts should “determine whether there is something in the bonus plan that would specifically remove the [employee's] common law entitlement.”3 The court explained that exclusion provisions must be absolutely clear and unambiguous, and will be strictly construed. Simply stating the employee must be ‘full-time or active' at the time the bonus is paid, is not sufficient to remove the common law entitlement of someone who was wrongfully dismissed.

In addition, the Court held that a clause purporting to remove an employee's common law rights when they are terminated either with or without cause, will not be sufficient if the employee was unlawfully terminated. To put it succinctly, in order to remove an employee's common law rights, the clause “must clearly cover the exact circumstances which have arisen.”4

What the Court made clear is that individuals terminated without notice are entitled to a quantum of damages which account for their salary, benefits and bonuses that would have been paid to the employee during the notice period. This does not cover discretionary bonuses that could have been paid to employees. Discretionary bonuses are assessed based on the test put forth in Singer, whereby the court must ask whether the bonus was “an integral part of his compensation package” to determine whether an employee would have received those discretionary bonuses during the reasonable notice periods.5

Good Faith

Mr. Matthews did not seek damages for mental distress flowing from a breach of the duty to exercise good faith. As a result, the court declined to determine whether or not Ocean had breached their duty to act in good faith. Additionally, the Court explains the quantum of damages would have been the same for both breaches, and therefore Mr. Matthews could not recover under both breaches without the quantum of damages resulting in double recovery.
As no remedies were being sought in relation to the breach of the duty to act in good faith, it appears the Court chose only to comment on bad faith conduct in an attempt to provide some clarity on the state of the law.

The Court affirms that a breach of the duty to exercise good faith, and wrongful dismissal are two separate breaches of contract. As well, any failure on the part of the employer to give reasonable notice does not turn on the presence or absence of good faith. The Court also confirms that the conduct of the employer can be reviewed when considering the breach of the duty to exercise good faith.

...a court may review events that have occurred over time, not merely at the moment of dismissal.

In circumstances of constructive dismissal, a court may review events that have occurred over time, not merely at the moment of dismissal. The duty to act in good faith is required continuously and up to the moment of dismissal.

The Court completed their decision recognizing the impact a proper acknowledgement of conduct contrary to the expected standard of good faith can have to individual employees. However, the Court makes it clear that in order to obtain their acknowledgement, the employee must provide an explanation as to what basis a court could make a formal declaration that conduct of their employer was in breach of the duty of good faith.

Conclusion

This decision provides a clear answer about how the quantum of damages for wrongful dismissal will be determined when an employee is terminated without reasonable notice. The employer will be obligated to pay damages to the employee accounting for the salary, benefits and bonuses that employee would have received if they were given reasonable notice. As well, (under these noted circumstances) any contractual obligation to provide a bonus will only be set aside if the exclusion clauses within the contract explicitly cover the exact situation faced by the parties.

This will undoubtedly require employers to re-think the terms of their contracts.


  1. Matthews v Ocean Nutrition Canada Ltd, 2020 SCC 26.
  2. bid, at para 52.
  3. Ibid.
  4. Supra, note 1 at para 66; Bauer v Bank of Montreal, [1980] 2 SCR 102, at p. 108.
  5. Supra, note 1 at para 57; Singer v Nordstrong Equipment Limited, 2018 ONCA 264, 47 CCEL (4th) 218 at para 21.

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