Canada's Supreme Court Entitles Dismissed Employees to Bonuses

​The Supreme Court of Canada unanimously ruled in October 2020 in favor of a former employee's entitlement to bonus pay and other benefits after being forced out of the company.

In a landmark ruling for employment law in Canada, the highest court in the country awarded a former senior executive nearly 1.1 million Canadian dollars (approximately 829,000 USD) for the loss of a long-term incentive plan payment he would have received for loyalty and years of service, according to James Fu, an attorney with Borden Ladner Gervais in Toronto.

Howard Levitt, an attorney with Levitt LLP in Toronto who represented the employee, told Canadian Lawyer magazine that the ruling will affect many Canadian employees who receive any kind of bonus, incentive or commission as part of their pay.

Lisa Goodfellow, an attorney with Miller Thomson LLP in Toronto, explained, "The Matthews v. Ocean Nutrition Canada Ltd. case considered whether incentive compensation such as bonuses should be included in calculating damages for wrongful dismissal."

Case Background

The employee, an experienced chemist, worked for Ocean Nutrition, a Nova Scotia-based nutritional supplement manufacturer, from 1997 to 2011. The employee participated in a long-term incentive plan that made him eligible for a payout if the company was up for sale. The employee resigned in 2011 and claimed more than a year later when a competitor bought Ocean Nutrition that managers mistreated him. He alleged "constructive dismissal"—in other words, that he was wrongfully forced to leave as a result of a hostile work environment created by the employer.

Because the chemist no longer worked at the company, the employer took the position that he was not entitled to payment.

The Supreme Court ruled that the employee wasn't given reasonable notice—a period of 15 months. The court also found that Ocean Nutrition had constructively dismissed the employee.

As a result of the Ocean Nutrition Canada case, if wrongfully dismissed employees are not given enough notice, employers will be liable to compensate them for bonuses or other incentives they would have earned during the proper notice period, Goodfellow explained. For employers to end the employment of workers in Canada, there must be a reason and notice.

"The ruling left the door open for employers to draft incentive plan language to exclude such amounts," Goodfellow added. "Going forward, the courts in Canada will closely scrutinize bonus and incentive plan language to determine whether there is an unambiguous limit on employees' common-law entitlements."

The Court's Legal Framework

The Supreme Court of Canada outlined two questions that courts should ask when deciding if an employee is entitled to payment under an incentive plan, Fu noted:

• Would the employee have been entitled to the bonus or benefit as part of his or her compensation during the reasonable-notice period?
• If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common-law right?

As for the first question, in this case, the court determined that the employee would have been entitled to receive the bonus during the reasonable-notice period, Fu said.

In response to the second question, the court determined that the employment contract did not take away that right. The contract language was not clear enough, according to the Supreme Court.

"In confirming the two-step approach, the Supreme Court of Canada wanted to emphasize an identifiable framework with a focus on the reasonable-notice period as a road map for lower courts—and employers, employees and their counsel—to assess employer obligations on a termination," said George Vassos, an attorney with Littler in Toronto.

The Supreme Court of Canada's decision is relevant in all Canadian jurisdictions, Fu stated.

Bottom Line for Canadian Employers

The Ocean Nutrition Canada case is not employer-friendly, Fu noted. "Employers may face increased claims from employees for compensation, even for periods of time when they are not working."

Vassos said Canadian employers and HR professionals should take the following steps to mitigate risk in response to the ruling:

• Regularly review the language of termination clauses in both employment agreements and hiring letters, as well as in equity and compensation plans—including bonuses and stock options.
• Revise employment agreements and compensation plans to reflect current case law.
• Bring termination clauses and their impact to employees' attention, as required.
• Encourage independent legal advice for employees.
• Assess whether the clauses are compatible under employment standards legislation.

"HR professionals should also recommend such changes and be alert to the timing of terminations and upcoming bonus or incentive awards," Goodfellow said.

Catherine Skrzypinski is a freelance writer based in Vancouver, British Columbia.