Stuart Rudner here with another Rudner Law video employment law update.
This is actually an update on a case that I reported on almost exactly two years ago. The case is Matthews v. Ocean Nutrition Canada and the Supreme Court of Canada has now weighed in on the issue of when employees will be entitled to things like bonuses or other variable compensation post-termination.
The bottom line is that in the absence of a very well-written contract, they will be. By way of background, we often discuss how much notice or severance someone is entitled to – there’s lots of myths out there, such as the fact that someone may only get their Employment Standards Act minimums, or others people that severance is one month per year. The law is that by default, every employee is entitled to reasonable notice of termination or pay in lieu thereof, what we often call severance. The fact is that unlike the myths, there are no easy calculations, there is no objective way to calculate it – it’s not one month per year, as the courts have always said, they’ll look at a bunch of factors including a person’s age, the nature of their job, the availability of similar work, etc. And if you look at the statistics, you will see that if you look at the last thirty or forty years, and you do a chart showing one month per year, the vast majority of time, your prediction is not going to be accurate. Some employees get more, some employees get less, because it depends on a bunch of different factors. The other issue, once we get past how many months someone is going to get, is what they’re going to get during the notice period.
That was the primary issue before the Supreme Court of Canada in Matthews. It’s a mistake to offer base salary as some employers do, because by default, employees are entitled to all of the compensation that they normally receive, and they’re entitled to continue earning that, as if they had continued working during the notice period – that includes things like salary, medical and dental benefits, bonuses, car allowances, and other compensation. In Matthews, the court found that Mr. Matthews had been constructively dismissed, he was entitled to participate in the long term incentive plan, or LTIP, and in that case the LTIP plan defined certain realization events, in other words, events that would trigger payment of the LTIP benefits. And one of those events was the sale of the company. In that case, Mr. Matthews had been working for a few years, and the relationship deteriorated and at some point he suspected the company was going to be sold and he also felt like he was being pushed out. He engaged in some negotiations with the company, to talk about a severance package, and he even indicated that he would be willing to waive or forfeit his severance in order to preserve his LTIP entitlement. They never reached an agreement, the relationship deteriorated further, and feeling like he had no choice, Mr. Matthews effectively left, and within a few days, he joined another company. Thirteen months later, Ocean Nutrition was sold for $540 million which triggered an entitlement, or would have triggered an entitlement, for Mr. Matthews for an LTIP payment of about a million dollars. Not surprisingly, Mr. Matthews commenced a claim, arguing that he had been constructively dismissed, and arguing that his damages should be assessed based upon what he would have been paid if he had worked through the notice period, which the parties eventually agreed would have been 15 months. So he would still have been around at the time the company was sold, and he would have received approximately a million dollar payout. The trial judge agreed with Mr. Matthews, the Court of Appeal disagreed, and found that he was not entitled to the million dollar payout.
This case went to the Supreme Court of Canada which sided with Mr. Matthews. They found that the contract failed to unambiguously preclude his entitlement to the LTIP payment and for the purpose of calculating wrongful dismissal damages, the employment contract is not treated as terminated until after the reasonable notice period expires.
The Supreme Court of Canada clarified the test for these cases. What the court should do is ask two questions when assessing whether someone is entitled to certain compensation post-termination as damages for breach of the duty to provide reasonable notice. First question: would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period? Second question: if you answered yes to the first one, do the terms of the employment contract, or the bonus plan, unambiguously take away or limit that common law right? If not, then the person will be entitled to it. The bottom line is that you can contract out of these obligations, but the onus is on the employer to do it clearly, unambiguously, or the default at law will apply, and the employee will be entitled to their compensation throughout the entire notice period. If you’re an employer, and you want to control your severance costs or limit payout of things like bonuses or LTIP payments post-termination, you need to have a well-drafted and properly implemented contract.
Frankly, we see a lot of contracts that are not worth the paper they’re printed on. And correspondingly, we see a lot of employers who are extremely disappointed because their severance costs are going to be far greater than they had anticipated. Similarly, if you’re an employee and you want to be cautious about not giving up rights that you may regret down the line, you need to ensure that you get proper legal advice because if you sign a contract which limits your post-termination rights, you may come to regret it and sadly we see this all the time, where people come to see us months or even years after they’ve signed a really bad contract and now they’re looking at a severance payout that is calculated in weeks, as opposed to months, and they’re wondering why, and we have to explain to them that it’s because of the contract they signed. On the bright side, in many cases, these contracts are not enforceable, so if you are an employee and you’re being told you are not entitled to your bonus or your LTIP after termination, don’t simply take the word of your employer, because in many cases it’s not true and you have a significant entitlement, like that of Mr. Matthews who collected a million dollars that his employer said he was not entitled to. The bottom line is that the employment relationship is a legal relationship. The contract is critical in determining your rights.
We’d be happy to give you the advice you need, so feel free to reach out to us, and make sure you understand your rights as an employee, or as an employer, make sure you don’t pay more than you have to, but also make sure that you don’t leave money on the table.
Thanks, have a great day, and stay safe.