SCC ruling: Terminated workers deserve proper payments

A recent Supreme Court decision provides important clarity on how language in employment contracts limiting severance payments cannot easily be used by employers to limit their liability to employees when they terminate their employment. The main message is that an employee’s right to damages cannot be easily displaced.

A quick review of the facts. The appellant, David Matthews, was a senior manager with Ocean Nutrition Canada. He was there for 15 years and by all accounts a valued employee. He signed a long-term incentive plan (LTIP) designed to reward employees for previous contributions and to provide an incentive to continue contributing to the company’s success. Under the LTIP, a “realization event” such as the sale of the company would trigger payments to employees who qualified under the plan.

A “realization event” happened here: Ocean Nutrition was sold. However, it was sold about a year after Matthews had left Ocean Nutrition when he could no longer stand a campaign of lying and abuse he was forced to endure. The trial judge, the Nova Scotia Court of Appeal (NSCA) and the Supreme Court of Canada (SCC) found that the pattern of conduct met the Potter constructive dismissal standard and that Matthews was owed 15 months’ notice.

Damages and that LTIP

Matthews claimed nearly $1.1 million under the LTIP: he argued that the company sale fell within the 15-month notice period he was awarded, and so he was entitled to be treated as an employee under that LTIP. The trial judge sided with him, citing the principle that one must put the wrongfully dismissed employee in the position he would have been in had he remained employed for the 15-month notice period. At the NSCA and the SCC, however, everything got muddy with the lawyers arguing about principles of bad faith and how it affects his damages. Matthews never claimed mental distress due to bad faith damage; he really just wanted his $1.1 million LTIP payment.

This decision is important because Matthews’ LTIP had most of the same features as other bonus plans or restricted stock unit plans. Like those plans, it has language to the effect that the employee must be employed on the key date to get his money. This plan also stated that a person is not considered an employee if “terminated” even without cause, and that LTIP funds cannot be used as part of “any severance calculation.” On a plain reading of these words, the appeal court held that Matthews was not an employee on the key date so the LTIP could not be added to his severance.

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The SCC resolved the issue by relying on orthodox wrongful dismissal damages principles instead of the doctrine of good faith. Citing a 2016 Ontario appeal court decision in Paquette v. TeraGo Networks Inc., the SCC judgment states that “courts should ‘consider the [employee’s] common law rights’ … that is, courts should examine whether, but for the termination, the employee would have been entitled to the bonus during the reasonable notice period. Second, courts should ‘determine whether there is something in the bonus plan that would specifically remove the [employee’s] common law entitlement … The question … is not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the [employee’s] common law rights.”

The Paquette two-step

While the main point of the decision is that the Paquette two-step is the test to use in deciding damages in wrongful dismissals, there is a lot in this decision that can be useful in other cases. For example, the court notes the LTIP exclusionary language is quite broad, as this contract states that only employees are eligible for LTIP payment and those dollars are not included in a severance calculation.

The SCC holds that this seemingly strong language does not unambiguously oust the right to damages on a lawful termination. In saying this, the upper court is saying the LTIP was a unilateral contract imposed on the employee and, thus does not oust common law rights.

As in Paquette, Matthews would have been an employee during the sale if he were not constructively dismissed.

Even more importantly, the SCC goes on to note that even if an LTIP states that payments will be calculated as part of the severance, that does not preclude common law rights to damages.

After this ruling, employment plans that have wording to the effect that “the LTIP will not form part of your pay during any notice period” can certainly be challenged, as the SCC is telling us that restriction does not apply to a damages claim.

Interesting points for future cases

One final highlight from this judgment comes near the end: “Finally, at this stage of the analysis, it may also be appropriate in certain cases to examine whether the clauses purporting to limit or take away an employee’s common law right were adequately brought to the employee’s attention.”

The SCC cites three ONCA decisions that dealt with failures to tell employees about changes to bonus and like plans, before stating “this issue … does not arise on these facts,” nor did Matthews’s counsel advance that argument.

I believe that this issue of bringing termination and limitations language to an employee’s attention is critical. Courts should pay attention to this and consider whether it is fair for employees, who rarely know their rights, to be deemed to have waived a significant damages claim if the language that causes the waiver is not drawn to their attention.