Supreme Court decision aggravates termination clause problems for employers

A recent decision from the Supreme Court of Canada suggests the test for employers seeking to limit recovery for unlawful termination damages related to long-term incentive plans may be insurmountable in practice.

The mid-October ruling concluded that David Matthews was entitled to a payout under his incentive plan when the company was sold 13 months after he’d been constructively dismissed as vice-president of Ocean Nutrition Canada Ltd., a Nova Scotia-based nutritional supplement manufacturer.

Read: Court of appeal ruling highlights language in incentive plans

This despite the fact the long-term incentive plan: required Matthews to be a “full-time employee” at the time of sale; stipulated the plan would be “of no force and effect” when his employment ceased; stated the “no force and effect” clause applied regardless of whether Matthews resigned or was terminated “with or without cause;” and provided the plan wasn’t to be “calculated as part of (Matthews’) compensation for any purpose, including in connection with the employee’s resignation or in any severance calculation.”

Although the court did clarify the law by reconciling conflicting decisions from various provinces, employers remain in a bind as to language that will relieve their long-term incentive plan obligations after termination.

“Even if we’re fully compliant with the decision, we’re never going to be able to tell clients that they are 100 per cent clear,” says Brian Thiessen, a partner in Osler Hoskin & Harcourt LLP’s Calgary office. “After all, plaintiffs’ lawyers are paid to find creative ways to get around the language.”

Read: A look at trends in long-term incentive plans

George Vassos, a partner at Littler LLP, a global and employment labour law boutique, is of similar mind. “It’s an ongoing battle for employers. Although the court provided some guidance as to why the language was not sufficient to preclude the incentive plan, they’ll never tell us what language is going to be right for all purposes.”

The drafting challenge is particularly tough when the crystallizing event is very specific, he says. “Under the terms of the LTIP, Matthews was entitled to the benefit if the company was sold within a certain period of time for a certain amount of dollars. It’s pretty difficult to focus on such a singular event when you’re drafting.”

What the court did explain was why the long-term incentive plan language didn’t oust Matthews’ rights. In particular, Matthews would have been “full-time” or “active” throughout the reasonable notice period of 15 months during which the sale took place, had he not been terminated; his termination didn’t fit within the “with or without cause” provision in the plan because, in the words of the court, “the employee suffered an unlawful termination since he was constructively dismissed without notice;” even if the clause had referred to an “unlawful” termination, termination doesn’t occur until the notice period expires; and preventing Matthews from seeking the benefit of the incentive plan as part of his “severance” didn’t limit his damages as “severance and damages are distinct legal concepts.”

Read: AIMCo case shows legal pitfalls of long-term incentive plans

Perhaps most ominous for employers, however, was the court’s suggestion that the duty of good faith, heretofore limited to the manner of termination, might exist for the duration of the employment contract.

The court didn’t decide the issue, as Matthews hadn’t raised a good faith argument at the Supreme Court in support of damages for mental distress or punitive damages. But Vassos believes a ruling may not be far off because the court is scheduled to hear two cases involving good faith issues in the near future.

“If the court eventually holds that good faith imbues the entire employment contract, does that mean that every decision an employer makes is reviewable on that basis?” he asks. “What if an employee who wants a six per cent salary increase claims that the employer’s decision to award only three per cent was not made in good faith? Will the courts have to decide?”

As Vassos sees it, getting the courts involved in the “ day-to-day mechanics” of the employment relationship makes no sense. “Our courts and tribunals already have their hands full enough with employment issues.” 

Read: Ontario Teachers’ loses appeal of $1M wrongful dismissal ruling