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Employment - Bonuses. Matthews v. Ocean Nutrition Canada Ltd.
In Matthews v. Ocean Nutrition Canada Ltd. (SCC, 2020) the Supreme Court of Canada, correcting a conflation between damage issues in the courts below, emphasizes the difference in wrongful dismissal cases between breach for failure to give reasonable notice, and breach for breach of good faith.
Here the court considered the awarding of damages for 'benefits' that would have come due during the pay-in-lieu period [see esp. para 55]:B. The Appropriate Method of Analysis
[42] Properly understood, the claim pursued here indeed rests on allegations of distinct contractual breaches of Mr. Matthews’ employment contract.
[43] Neither party disputes that, at common law, an employer has the right to terminate the employment contract without cause — or, in this case, prompt the employee to choose to leave their job in circumstances that amount to a dismissal — subject to the duty to provide reasonable notice, a right which, as this Court noted in Farber v. Royal Trust Co., 1997 CanLII 387 (SCC), [1997] 1 S.C.R. 846, at para. 23, is reciprocal in the contract of employment. When breached, the obligation to provide reasonable notice does not, in theory, turn on the presence or absence of good faith: it is, in a manner of speaking, a “good faith” wrongful dismissal (see Machtinger, at p. 990). The contractual breach that arises from the employer’s choice in this regard is simply the failure to provide reasonable notice, which leads to an award of damages in lieu thereof (Wallace, at para. 115, per McLachlin J., as she then was, dissenting, but not on this point). There is some dispute in the cases regarding how to determine what damages should be awarded in the event of a breach, which I will consider below, but this breach does not turn on whether or not the employer acted honestly or in good faith.
[44] Running parallel to the argument on reasonable notice, Mr. Matthews has alleged that his termination was also in breach of contract because it failed to meet the expected standard of good faith. Under rules recognized by this Court in Bhasin and Potter, an unhappy employee can allege dishonesty in the performance of the contract by the employer — i.e., a breach of the duty of honest performance, which Cromwell J. in Bhasin described as contractual doctrine — independently of any failure to provide reasonable notice. This Court has also recognized in Wallace and Keays that an unhappy employee can allege mistreatment — i.e., conduct that is “unfair or is in bad faith by being, for example, untruthful, misleading or unduly insensitive” — in the manner of dismissal by the employer (Wallace, at para. 98; Keays, at para. 57). A breach of the duty to exercise good faith in the manner of dismissal is also independent of any failure to provide reasonable notice. It can serve as a basis to answer for foreseeable injury that results from callous or insensitive conduct in the manner of dismissal, a point to which I will return to at the conclusion of these reasons (Wallace, at para. 88).
[45] Importantly, damages arising out of the same dismissal are calculated differently depending on the breach invoked. Again, this is nothing but a reflection of settled law. In Keays, at para. 56, for example, Bastarache J. helpfully explained that “[t]he contract of employment is, by its very terms, subject to cancellation on notice or subject to payment of damages in lieu of notice without regard to the ordinary psychological impact of that decision”. By contrast, he explained that failure to act in good faith during the manner of dismissal “can lead to foreseeable, compensable damages” based on the Hadley principle (para. 58). Contrary to what had been thought until that time, an extension of the notice period was not to be used to determine the proper amount to be paid (para. 59). This is because the nature of the contractual breach is of a different order than that associated with the failure to provide reasonable notice. Indeed, it is this fundamental difference that explains why principles of mitigation apply differently to mental distress damages flowing from a breach of the good faith obligation in the manner of dismissal (Evans v. Teamsters Local Union No. 31, 2008 SCC 20, [2008] 1 S.C.R. 661, at para. 32).
[46] With this in mind, I turn now to examine the duty to provide reasonable notice, which as will become plain, is dispositive of this appeal.
(1) Duty to Provide Reasonable Notice
[47] In the case at bar, the only disagreement in respect of reasonable notice turns on whether Mr. Matthews’ damages include an amount to compensate him for his lost LTIP payment.
[48] In my respectful view, the majority of the Court of Appeal erred by focusing on whether the terms of the LTIP were “plain and unambiguous” instead of asking what damages were appropriately due for Ocean’s failure to provide Mr. Matthews with reasonable notice. The issue is not whether Mr. Matthews is entitled to the LTIP in itself, but rather what damages he is entitled to and whether he was entitled to compensation for bonuses he would have earned had Ocean not breached the employment contract. By focusing narrowly on the former question, the Court of Appeal applied an incorrect principle, resulting in what I see as an overriding error.
(a) Redress for Breach of the Implied Term to Provide Reasonable Notice of Termination
[49] Insofar as Mr. Matthews was constructively dismissed without notice, he was entitled to damages representing the salary, including bonuses, he would have earned during the 15-month period (Wallace, at paras. 65-67). This is so because the remedy for a breach of the implied term to provide reasonable notice is an award of damages based on the period of notice which should have been given, with the damages representing “what the employee would have earned in this period” (para. 115). Whether payments under incentive bonuses, such as the LTIP in this case, are to be included in these damages is a common and recurring issue in the law of wrongful dismissal. To answer this question, the trial judge relied on Paquette and Lin from the Court of Appeal for Ontario. I believe he took the right approach.
[50] In Paquette, the employee participated in his employer’s bonus plan, which stipulated that employees had to be “actively employed” on the date of the bonus payout. That language is broadly comparable to that found in the LTIP which, at clause 2.03, requires the claimant to be a “full-time employee” of the company. In Paquette, but for the employee’s termination, the employee would have received the bonus within the reasonable notice period. The motion judge in that case, however, concluded that the employee was not entitled to the bonus because, while he may have been “notionally” employed during the reasonable notice period, he was not “actively” employed and so did not qualify under the terms of the plan.
[51] The employee’s appeal was allowed. The Ontario Court of Appeal relied principally on its prior decision in Taggart v. Canada Life Assurance Co. (2006), 50 C.C.P.B. 163, concerning a similar question related to pension benefits. In that case, Sharpe J.A. rightly cautioned that courts should not ignore the legal nature of employees’ claims. “The claim is not”, he said, “for the pension benefits themselves. Rather, it is for common law contract damages as compensation for the pension benefits [the employee] would have earned had [the employer] not breached the contract of employment” (para. 16). Consequently, “a terminated employee is entitled to claim damages for the loss of pension benefits that would have accrued had the employee worked until the end of the notice period” (para. 13). With respect to the role of a bonus plan’s contractual terms, Sharpe J.A. explained that “[t]he question at this stage is whether there is something in the language of the pension contract between the parties that takes away or limits that common law right” (para. 20).
[52] The Court of Appeal in Paquette built upon the approach in Taggart, proposing that courts should take a two-step approach to these questions. First, courts should “consider the [employee’s] common law rights” (para. 30). 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” (para. 31). “The question”, van Rensburg J.A. explained, “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” (para. 31).
[53] I agree with van Rensburg J.A. that this is the appropriate approach. It accords with basic principles of damages for constructive dismissal, anchoring the analysis around reasonable notice. As the court recognized in Taggart, and reiterated in Paquette, when employees sue for damages for constructive dismissal, they are claiming for damages as compensation for the income, benefits, and bonuses they would have received had the employer not breached the implied term to provide reasonable notice (see also Iacobucci v. WIC Radio Ltd., 1999 BCCA 753, 72 B.C.L.R. (3d) 234, at paras. 19 and 24; Gillies v. Goldman Sachs Canada Inc., 2001 BCCA 683, 95 B.C.L.R. (3d) 260, at paras. 10-12 and 25; Keays, at paras. 54-55). Proceeding directly to an examination of contractual terms divorces the question of damages from the underlying breach, which is an error in principle.
[54] Moreover, the approach in Paquette respects the well-established understanding that the contract effectively “remains alive” for the purposes of assessing the employee’s damages, in order to determine what compensation the employee would have been entitled to but for the dismissal (see, e.g., Nygard Int. Ltd. v. Robinson (1990), 1990 CanLII 1991 (BC CA), 46 B.C.L.R. (2d) 103 (C.A.), at pp. 106-7, per Southin J.A., concurring; Gillies, at para. 17).
[55] 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? . Celestini v. Shoplogix Inc.
In Celestini v. Shoplogix Inc. (Ont CA, 2023) the Court of Appeal considered the law of 'bonuses' in the employment termination context:[51] The motion judge properly considered this issue by applying the decision of the Supreme Court in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, 449 D.L.R. (4th) 583. In Matthews, at paras. 52-55, the Supreme Court adopted this court’s approach to interpreting bonus entitlement as set out in Paquette v. TeraGo Networks Inc., 2016 ONCA 618, 34 C.C.E.L. (4th) 26, and Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619, 402 D.L.R. (4th) 325. The analysis is two-part: (1) would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period?; and (2) if so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?.
[52] In Paquette, van Rensburg J.A. concluded that a condition requiring an employee to be “actively employed” by the employer on the date of the bonus payout was insufficient to displace the employee’s common law entitlement to damages for a lost bonus: see para. 47. In Lin, she concluded that a clause stating that no bonus shall be earned or payable where an employee resigns or the employee’s employment is terminated prior to the payout of a bonus was also insufficient to displace the common law entitlement to a bonus payment because it is, in effect, the same as a requirement of “active employment” at the date of bonus payout: see paras. 86-89.
[53] In Matthews, the long-term incentive plan provided for a bonus payment if the employer was sold and the employee was still employed by the employer at time of sale. The particular provision at issue stated as follows:2.03 CONDITIONS PRECEDENT: 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 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. [Emphasis added.] [54] Kasirer J., writing for a unanimous court, held, at para. 65, that language requiring an employee to be “full-time” or “active” is not sufficient to remove an employee’s common law right to damages. Similarly, at para. 66, he also concluded that a clause purporting to remove an entitlement to the bonus upon termination “with or without cause” did not remove the right to damages for loss of the entitlement to earn that bonus during the reasonable notice period. He reasoned that:Here, Mr. Matthews suffered an unlawful termination since he was constructively dismissed without notice. As this Court held in Bauer v. Bank of Montreal, 1980 CanLII 12 (SCC), [1980] 2 S.C.R. 102, at p. 108, exclusion clauses “must clearly cover the exact circumstances which have arisen”. So, in Mr. Matthews’ case, the trial judge properly recognized that “[t]ermination without cause does not imply termination without notice” (para. 399; see also Veer v. Dover Corp. (Canada) Ltd. (1999), 1999 CanLII 3008 (ON CA), 120 O.A.C. 394, at para. 14; Lin, at para. 91). Yet, it 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. [Emphasis in original.] [55] The ICA provides that if Shoplogix terminated Mr. Celestini’s employment for a reason other than cause, then Shoplogix would pay the bonus earned up to the date of termination. Like the clauses considered in Matthews and Lin, s. 2 of the ICA does not unambiguously oust Mr. Celestini’s right to damages upon the circumstances that actually arose, that is, a without cause termination without reasonable notice − termination without cause must be taken to mean a lawful termination following the reasonable notice period. I agree with the motion judge that the ICA did not oust the right to common law damages representing the loss of bonus over the reasonable notice period.
[56] Shoplogix also argues that the motion judge erred in quantifying Mr. Celestini’s bonus entitlement.
[57] Shoplogix submits that there was no legal or factual basis for the motion judge to calculate what Mr. Celestini would have earned had he been given reasonable notice by averaging the annual bonuses that he earned in the last three calendar years immediately preceding his dismissal.
[58] In my view, there is no merit to this argument. Calculations of damages are entitled to considerable deference on appeal and will not be interfered with in the absence of an error of law or principle, a misapprehension of evidence, or if palpably incorrect: SFC Litigation Trust v. Chan, 2019 ONCA 525, 147 O.R. (3d) 145, at para. 112.
[59] There is no one particular way of calculating an employee’s damages related to the lost opportunity to earn a bonus. This court has affirmed trial judges’ calculations of the bonus based on a three-year average prior to dismissal especially where, as here, the bonus calculation could not have been performed in the usual manner because a portion of its components was based on work performance: see Bernier v. Nygard International Partnership, 2013 ONCA 780, 14 C.C.E.L. (4th) 155, at para. 5; Paquette, at para. 49.
[60] Like the court in Bernier, the motion judge in this case noted that a component of Mr. Celestini’s bonus was based on his performance. He further observed that the parties had not adduced any evidence of Shoplogix’s actual business performance in the 2017 and 2018 fiscal years: see para. 75. He rejected the calculation of Shoplogix’s expert because it was unclear how he came to his figure. It was for these reasons that the motion judge utilized an average based on what was paid in 2014, 2015 and 2016.
[61] In my view, the motion judge made no reversible error in adopting an averaging approach for the bonus entitlement that would have been earned in the notice period.
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