The Importance of Language in Employment Contracts, Policies and Clauses
Employees often encounter incentive plan agreements that contain language limiting or eliminating their ability to collect such payments upon the termination of their employment. With the recent Supreme Court of Canada decision in Matthews v. Ocean Nutrition Canada Ltd., employers will be reviewing these plans in order to determine if such limiting provisions remain effective.
Matthews v. Ocean Nutrition Canada Ltd.
Mr. Matthews was employed by Ocean Nutrition Canada (“ONC”) for around 14 years. As part of his compensation package, he had a Long Term Incentive Plan (“LTIP”). Under the terms of the LTIP, Mr. Matthews was entitled to a significant bonus if the company was sold.
Roughly 10 years into Mr. Matthews’ employment, there were management changes. These changes eventually led to a situation where Mr. Matthews found the workplace to be intolerable. He eventually quit and brought a claim for constructive dismissal. 13 months after Mr. Matthews left, ONC was sold. Under the terms of the LTIP, were Mr. Matthews employed at that time, he would be entitled to a bonus of more than $1 million. The contract seemed to say however that regardless of why you were no longer employed when the event that triggered the bonus occurred, you were not entitled to the LTIP payment.
2.03 CONDITIONS PRECEDENT:
ONC shall have no obligation under this Agreement to the Employee unless on the date of a Realization Event (i.e. the sale of the business in this case) 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.
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 13 months mentioned earlier is of great significance because Mr. Matthews was awarded 15 months’ notice of termination all the way up to the Supreme Court and, as such, the time at which the LTIP triggering event occurred was captured in the notice period. The length and entitlement to notice was not at issue. What the Supreme Court had to decide was whether Mr. Matthews was entitled to damages for that LTIP payment of more than $1 million that was triggered by the sale of ONC.
The Supreme Court’s Decision
The Supreme Court determined that courts should ask two questions when faced with a situation like this:
- 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?
With respect to the first question, it was clear to the Court that if not for his constructive dismissal, Mr. Matthews would have been actively employed at the time of the sale of the business and therefore entitled to the LTIP payment.
With respect to the second question, the Court determined that the contract did not take away the right to the bonus as the language did not clearly cover the circumstances as they occurred in Mr. Matthews’ case. The Court also indicated that in certain circumstances it may be appropriate to examine whether a clause like this, that removes an employee’s common law right to a significant payment, was adequately brought to the employee’s attention.
Given that this kind of entitlement limiting language is common place in clauses found in incentive plans, commission plans, bonus plans and the like, the impact of this case looks to be significant. It will definitely spur employers to attempt to update the language contained in their plans and give employees pause for thought when presented with new contracts and policy documents to sign that are designed to address this Supreme Court decision.
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