Summary
- When an employee is wrongfully dismissed, they are entitled to a retroactive payment of “reasonable notice” from their employer. (“Reasonable notice” is a judicial assessment of the length of notice that the employer should have given the employee prior to letting them go).
- By default, the reasonable notice payment includes the employee’s base salary, as well as anything that was an integral part of their compensation (such as benefits).
- However, employers are allowed to draft the terms of employees’ benefits contracts (eg. commission plans, bonus payments, etc.) in a way that excludes their entitlement to those benefits during the notice period.
- Judges have written a mixed bag of decisions with regards to the precise language that an employer must use in order to validly and legally draft such a contract.
- The Supreme Court’s decision on October 9th, 2020, raised the bar higher for employers, and simultaneously added a further layer of complexity to the analysis.
- Even where the benefits contract explicitly states that benefits will not be paid in the event of a wrongful termination, that alone is not sufficient to disentitle the employee to those benefits.
- Here, this resulted in Mr. Matthews’ entitlement to about a million dollars.
Legal Background
Before an employer lets an employee go, they’re entitled to “notice” of that termination or alternatively to “pay in lieu” of that notice. (No – that doesn’t include where an employer has proper “cause” for terminating an employee.)
It’s a point that most folks probably haven’t wrapped their heads around: as long as employers give the right amount of notice, they don’t need a reason to let someone go and they’re legally entitled to do so. (For more on determining the length of notice that an employer must provide and the factors that lead to this determination, check out my previous article.)
It’s worth noting that chances are, any existing employment contract’s termination provision is unenforceable. Howard Levitt – this guy wrote the textbook on Employment Law – has estimated that less than five per cent of employment contracts contain enforceable termination clauses (check out his article here). Importantly, this means that employees are probably entitled to a longer notice period than what employers may be giving them, more than what the Employment Standards Act sets out, and more than what any employment contract sets out. And in some cases, much longer.
“Pay in lieu of notice” – by default – includes benefits that an employee would have earned during their notice period
Typically, rather than giving an employee notice of termination and having them continue coming into work (“working notice”), Employers will pay out that time as if the employee had kept coming into work. In either case, the default rule is that employees are entitled to the bonuses, commissions, stock options, etc. they would have earned during that time (I’ll just call these things “benefits” from here on out). It’s not just about lost salary. It’s about the whole package.
Here’s an example.
Let’s say someone has been been working as a Salesperson at a cool tech Company in town for the last 10 years – since January, 2010. The Company is primarily in the business of manufacturing a state-of-the-art technology: solar roadway panels. The employee is 60 years old and selling solar roadways – a very niche market – have been their bread and butter for about 20 years. Their base salary for the 2020 calendar year was set to be $70,000.00. And for the 2021 calendar year was set to be $72,000.00.
The other great part of this job was the bonus that the employee would receive every January. So long as they had met their sales targets, the Company historically provided them a bonus payment of $6,000.00 each year.
Then, without providing any notice, the Company let the employee go in January, 2020.
This is a wrongful termination, entitling the employee to reasonable notice. And in cases like this, judges would likely award somewhere around 15 months of notice. (See my previous article for why that is).
So graphically, here’s the employee’s employment history:
Assuming that the employee was unable to find another job and mitigate their damages, here is the breakdown of what the employee is owed:
If the Employer had been smart, it could have drafted bonus terms and conditions in a way that excluded the employee’s default entitlement to the bonus. In this example, it didn’t – so the employee is entitled to those $12,000.00 in unpaid bonuses.
(And look – a smart employer probably wouldn’t offer those bonuses in a severance package unless the employee asked. Nor would they be likely to offer anywhere close to the true entitlement to pay in lieu of notice – here totaling $88,000.00. Chances are the employee wouldn’t even realize they were entitled to any of this. So why would an employer offer $100,000.00 up front if the employee might agree to far less and walk away?)
How must an employer draft its terms and conditions if it wants to exclude an employee’s entitlement to benefits?
Today, the Supreme Court seems to have raised the bar even higher for Employers, and has added a further layer of complexity to this question. Even where the benefits contract explicitly mentions that benefits will not be paid in the event of a wrongful termination, this will still not be sufficient to unambiguously alter or remove the employee’s default entitlement to those benefits. Something more is required.
We have known for some time that employers are allowed to draft contracts in a way that excludes employees’ entitlement to benefits during the notice period. The Ontario Court of Appeal has been clear that in so doing, the contract must “unambiguously alter or remove” the employee’s default right to receive those benefits (see its decision in Paquette from 2016, if you’re interested, at paragraph 31).
With the Supreme Court’s decision, there continues to be some uncertainty about which words and phrasing an Employer must use to do so legally. What contractual wording amounts to “unambiguously altering or removing” an employee’s default rights to these benefits?
Previous judgments have been inconsistent on this question.
Check out the following contractual word choices, each found to be insufficient to disentitle an employee to benefits during their notice period (i.e. “ambiguous”):
- A contract that requires “active employment” for the employee to receive benefits during the notice period. (See the Paquette decision at paragraph 47).
- A contract stating that “[t]he benefits conferred herein shall not be used to increase damages in respect of the dismissal or termination of employment of any Member or Field Management Member.” (See the Taggart decision at paragraph 22).
- Where the contract states: “In the event that the Participant’s employment with the Company terminates for any reason other than death, Disability or for Cause, the RSUs shall cease to vest and any unvested RSUs shall be cancelled immediately without consideration as of the date of such termination.” (See the Ontario Court of Appeal’s 2019 decision, IMAX).
- A contract stating that “If the option holder’s employment with the corporation … is terminated for any reason other than … [death, retirement or incapacity], whether such termination be voluntary or involuntary, without his having fully exercised his option, the option shall be cancelled and he shall have no further rights to exercise his option or any part thereof and all of his rights hereunder shall terminate as of the effective date of such termination.” (See the Veer decision, which is unavailable for free public viewing, unfortunately).
And compare these with the following contractual wordings which were sufficient to disentitle an employee to benefits during their notice period (i.e. “unambiguous”):
- Where the employee “ceases to perform services for” the employer, the contract disentitles the individual to benefits. (See the Ontario Court of Appeal’s 2004 decision in Kieran – note that this was a case regarding the exercise of stock options during the reasonable notice period).
- Where “ceasing to be an employee,” the contract disentitles the individual to benefits. (See the Brock v Matthews Group decision, which is unavailable for free public viewing, unfortunately).
Facts of the case before the Supreme Court
The employee in this case, David Matthews, was the VP of Ocean Nutrition Inc. He argued that he was wrongfully dismissed from the Company and entitled to be paid his Long Term Incentive Plan (LTIP) amounts – totaling $1,086,893.36.
Back in 2007, another company had tried to persuade Matthews to leave Ocean Nutrition and come work for them. But Ocean Nutrition – wanting to keep him – offered Matthews an incentive plan which effectively persuaded him to stay (the LTIP).
Around the same time, the leadership at Ocean Nutrition changed. Matthews began reporting to a new Chief Operating Officer, beginning a new, rocky and complicated relationship with the Company leadership. He lost several responsibilities and was denied additional work, leaving him with only a couple hours of work each day. Matthews then quit, joined another company, and argued that he had been “constructively dismissed” from Ocean Nutrition.
At trial, the Nova Scotia Court found that Matthews was constructively dismissed and ordered that he was entitled to 15 months of notice (see the decision here). (Matthews found another job within a month, so the Court ordered that Ocean Nutrition pay him only the one month of salary).
The Court also found that Matthews was entitled to the million dollar LTIP payouts (which he would have earned had he been employed during the 15 month notice period).
On Appeal, the Nova Scotia Court of Appeal denied Matthews the million dollar LTIP payout. The Court found that the contractual language which Ocean Nutrition used in its LTIP plan was sufficient to deny Matthews any right to collect those benefits during the notice period.
The language in the LTIP Plan in this case read:
- “ONC shall have no obligation under this Agreement to the Employee unless on the date of a Realization Event the Employee is a full-time employee of ONC. For greater certainty, this Agreement shall be of no force or effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.”
…
- “The [Plan] … 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 Supreme Court’s Finding
The Supreme Court of Canada agreed with the trial judge, and overturned the Court of Appeal’s finding, holding that Matthews was entitled to the LTIP amounts.
The Court agreed with the Paquette decision by the Ontario Court of Appeal writing:
“Courts should accordingly ask two questions when determining whether the appropriate quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and certain other benefits. Would the employee have been entitled to the bonus or benefit as part of their 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?” (See the Supreme Court’s decision at paragraph 55).
Applied in the current context, the Court found that the contractual language was insufficient to disentitle Matthews to the LTIP amounts. The Court wrote:
“[I]t bears repeating that, for the purpose of calculating wrongful dismissal damages, the employment contract is not treated as “terminated” until after the reasonable notice period expires. So, even if the clause had expressly referred to an unlawful termination, in my view, this too would not unambiguously alter the employee’s common law entitlement” (see paragraph 66).
And therefore, the clause did not unambiguously alter or remove Matthews’ entitlement to the LTIP payment.
Conclusion
Employers are held to a high bar when it comes to most things, and especially in cases such as this where they seek to contract-out of employees’ default entitlements. Although the bar is certainly high, the Supreme Court has provided some additional clarity in this area. If it is possible to contract out-out of employees’ benefits entitlements during their reasonable notice periods, the language used in such benefits contracts must be iron-clad in the likes that perhaps no-one has seen.
Employees: reach out to a lawyer before you accept a severance package from your employer. There is likely a lot of money still “on the table.”
Employers: draft your incentive plans carefully – reach out to a lawyer to limit your future liabilities (especially where there’s a million bucks on the table!)
Disclaimer: This article is provided as an information resource. This article should not be relied upon to make decisions and is not intended to replace advice from a qualified legal professional. In all cases, contact your legal professional for advice on any matter referenced in this document before making decisions. Any use of this document does not constitute a lawyer-client relationship. Please note that this information is current only to the date of posting. The law is constantly changing and always evolving. I encourage you to reach out with any specific questions.