A recent Supreme Court of Canada decision offers helpful guidance on incentive compensation during a reasonable notice period.
In Matthews v Ocean Nutrition Canada, the employee alleged constructive dismissal based on years of mistreatment. Included in the employee’s claim was recovery under the employer’s incentive plan for a payout that he otherwise would have received during the working notice period. Overturning the Court of Appeal’s decision, the Supreme Court found that the employee was entitled to 15-months’ notice and compensation under the incentive plan totalling almost $1.1 million.
In its reasons, the Court first assessed whether the employee would have been entitled to the benefit during the notice period. In responding affirmatively, the Court noted that the triggering event for the payout (i.e., sale of the company) occurred during the notice period. The Court distinguished the facts from discretionary bonus cases (where an inquiry is often made into whether the benefit is “integral”) on the basis that it was clear that “but for” the dismissal, the employee would have received payment.
After finding that the employee was entitled to incentive compensation at common law, the Court went on to consider whether the plan language in question unambiguously removed the employee’s entitlement. The Court found that the language did not.
In its reasons, the Court stated that the following commonly used contractual language will typically fall short of removing an employee’s entitlement to incentive compensation during the common law notice period:
- A requirement that an employee be “full-time” or “active” at the time of a payout;
- Purported disentitlement upon termination of employment “with or without cause” or in the event of an “unlawful termination”;
- Restrictions on incorporating compensation for incentive pay into severance calculations; and
- Statements that the plan has “no current or future value”.
Another salient point from the decision is the comment in obiter that it will sometimes be appropriate for courts to consider whether the limiting plan language was brought to the employee’s attention and is in line with employment standards. On this point, see also recent Ontario Superior Court decision, Battison v Microsoft Canada Inc.
While the Matthews decision does not necessarily pave new ground, it clarifies and reiterates established bonus principles.
The bottom line is that employees will often be entitled to incentive compensation during a period of notice post-termination unless an employer has legally and very clearly limited an employee’s rights on termination with unambiguous contractual language.