The Supreme Court of Canada’s decision in Matthews v. Ocean Nutrition Canada Ltd, 2020 CarswellNS 615 (S.C.C.) (Matthews v. Ocean Nutrition), is essential reading for lawyers who advise on employee compensation plans or agreements.
Note: The Matthews v. Ocean Nutrition decision is also of interest to employment lawyers for its discussion of the duty of good faith in the employment relationship. That subject is beyond the scope of this Legal Update.
Restricting Employee Compensation Entitlements
Bonuses, pensions, and equity-related compensation incentivize employee performance and retention. By tying significant sums to business performance or continued employment (or both), these arrangements encourage diligence and loyalty in a workforce.
When an employee leaves the business there is no longer a need to pay for performance or retention. Often employers will draft terms that attempt to end these arrangements when the employment relationship ends. Unless those terms are drafted in compliance with the principles reviewed in Matthews v. Ocean Nutrition, they will not prevent an employee from claiming wrongful dismissal damages for lost compensation if they are dismissed without cause. An employer may find itself paying damages for a lost bonus or incentive payment long after the employee has stopped working for the employer.
The Matthews v. Ocean Nutrition decision sets a very high bar for the enforceability of such limitation language.
Background in Matthews v. Ocean Nutrition
David Matthews (”Matthews”) was a long-term employee of Ocean Nutrition Canada Ltd (”Ocean”). He was a chemist with the rare skills needed to run a large-scale omega-3 processing facility. Beginning in 1997, he occupied various senior management positions with Ocean and was instrumental in building the value of the company.
The Long-Term Incentive Plan
In 2007, Matthews agreed to a Long-Term Incentive Plan (”LTIP”) introduced by Ocean. The LTIP provided for a payment (the “LTIP Payment”) upon the sale of the company (the “Realization Event”). The LTIP had two goals:
- Rewarding key employees for contributions to Ocean.
- Providing an incentive to continue contributing to Ocean’s success.
The LTIP contained limitation language that attempted to eliminate an employee’s entitlement to the LTIP Payment upon termination of the employment relationship. The relevant provisions stated:
”2.03 CONDITIONS PRECEDENT:
[Ocean] 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 [Ocean]. For greater certainty, this Agreement shall be of no force and effect if the employee ceases to be an employee of [Ocean], regardless of whether the Employee resigns or is terminated, with or without cause.
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 End of Matthews’ Employment
In 2007, Ocean also hired a new Chief Operating Officer, Daniel Emond (”Emond”). Emond carried on a years-long campaign to undermine Matthews, limiting Matthews’ responsibilities, lying about Matthews’ status with the company and ignoring Matthews’ requests for changes or dialogue. Ultimately, Emond and others in Ocean management made continued employment intolerable for Matthews.
Matthews wanted to stay in his role because he was aware that Ocean was preparing to sell the company and he wanted to collect the LTIP Payment when that occurred. Negotiations over a possible termination package failed, and Matthews took a new position elsewhere. Approximately 13 months after Matthews’ departure, Ocean was sold.
The sale of Ocean constituted the Realization Event, triggering payment to participants under the LTIP. Since Matthews was not actively employed on the date of the Realization Event, Ocean took the position that he was not entitled to the LTIP Payment.
Matthews filed an application against Ocean, alleging constructive dismissal and bad faith in the manner of dismissal. He claimed damages for loss of pay, bonuses, and benefits, including the LTIP Payment, as well as punitive damages and compensation under an oppression remedy under Nova Scotia’s business corporation legislation.