Supreme Court Clarifies Damages for Bonuses Arising During the Notice Period in Matthews v Ocean Nutrition Canada Ltd.

A common issue in wrongful dismissal claims, including constructive dismissal claims, is an employee's entitlement to damages for remuneration other than base wages, such as commissions, bonuses, equity grants, or other forms of "incentive" compensation. Employers often seek to contractually limit employees' entitlements in respect of these amounts after termination, with varying degrees of success.

In Matthews v Ocean Nutrition Canada Ltd., 2020 SCC 26 (“Ocean”), the Supreme Court harmonized the common law approach to wrongful dismissal damages for these forms of remuneration by endorsing the Ontario Court of Appeal's two-step approach in Paquette v TerraGo Networks Inc., 2016 ONCA 618:

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?

The law in Ontario has therefore not changed as a result of the Ocean decision. The Supreme Court has, however, provided helpful guidance regarding the application of this test.

In Ocean, the employer, Ocean Nutrition Canada Limited ("ONC"), and the employee, David Matthews, were parties to a long-term incentive plan (LTIP).  The LTIP required ONC to make a cash bonus payment to certain executive employees, including Mr. Matthews, if and when a sale of the company occurred.

The LTIP contained two provisions that purported to extinguish Mr. Matthews' entitlements under it after the termination of his employment:

2.03 CONDITIONS PRECEDENT:

ONC shall have no obligation under this Agreement to the Employee unless on the date of a Realization Event [i.e. a sale transaction, defined elsewhere in the LTIP] the Employee is a full-time employee of ONC.  For greater certainty, this Agreement shall be of no force and effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.

[…]

2.05 GENERAL:

The Long Term Value Creation Bonus Plan does not have any current or future value other than on the date of a Realization Event and shall not be calculated as part of the Employee's compensation for any purpose, including in connection with the Employee's resignation or in any severance calculation.

The courts below held that ONC constructively dismissed Mr. Matthews from his employment, and that he was entitled to damages for a 15-month reasonable notice period. These findings were not challenged by either party in Mr. Matthews' appeal to the Supreme Court, which arose from the following issue.