The “Quebec” Perspective- Termination of Employment and Incentive Plans: What are the Consequences of Matthews v. Ocean Nutrition Canada?

October 26, 2020

On October 14, 2020, our colleagues Gary T. Clarke, David M. Price, and Maja Blanchette published a blog, from a common law perspective, on the Supreme Court of Canada’s decision in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 25 ("Matthews"). The present blog weighs the effect of this decision under Québec civil law. In Matthews, the Supreme Court of Canada confirmed the test for determining whether incentive payments and other benefits should be included in the quantum of damages awarded for breach of the implied common law obligation to provide reasonable notice of termination. The SCC confirmed that only clear and unambiguous language can deprive an employee of his entitlement to receive an incentive payment that would have become payable during the reasonable notice period if the employee had not been terminated. Nevertheless, it remains unclear from the decision what language would satisfy this requirement.

The Facts[1]

The appellant ("Employee"), an experienced chemist, was employed by Ocean Nutrition Canada Ltd ("Employer") from 1997 to 2011. The Employee occupied several senior management positions and as a senior executive participated in the Employer's long-term incentive plan ("LTIP"). Under the LTIP, a "Realization Event", such as the sale of the company, would trigger payments to eligible employees.

Key provisions of the LTIP included the following:

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 or effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.

2.05 GENERAL:
The Long Term Value Creation Bonus Plan does not have any current or future value other than on the date of the 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.

In 2007, the Employer hired a new Chief Operating Officer ("COO") who developed a dislike of the Employee and began a campaign to marginalize him. Despite the issues that developed with the COO, the LTIP was a key reason why the Employee stayed with the company, as he anticipated that the Employer would be sold soon. However, the Employee eventually resigned and took a position with a new employer in 2011.

Approximately 13 months following the Employee's departure, the Employer was sold. The sale constituted a "Realization Event" for the purposes of the LTIP. Since the Employee was not employed by the Employer on the date of the sale, the Employee did not receive a payment. The Employee filed a claim against the Employer for constructive dismissal, alleging his job duties were changed over the course of several years leading up to his resignation and that he was entitled to a reasonable notice period of 15 months, which would include the Realization Event.

The SCC Decision[2]

In a unanimous decision, the SCC set aside the Nova Scotia Court of Appeal’s judgment and restored the trial judgment. On appeal to the SCC, the fact that the Employee was constructively dismissed and was entitled to notice was no longer in dispute. However, the parties continued to disagree as to the remedies that should be afforded to the Employee at common law, in particular whether the damages payable for failure to provide reasonable notice should include the LTIP payment.

At common law, employees are entitled to reasonable notice of termination as an implied term of the employment contract. The SCC clarified that the remedy for a breach of this 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 received during this period. The SCC concluded that when determining whether the damages for breach of the implied term to provide reasonable notice should include incentive payments and other benefits, courts should ask two questions:

  1. Would the employee have been entitled to the incentive payment or benefit as part of their compensation during the reasonable notice period?
  1. If so, do the terms of the employment contract or incentive plan unambiguously take away or limit that common law right?

The SCC noted that the issue of whether the incentive payment or benefit is integral or discretionary can be considered as part of the first question, to determine if the employee would have received the incentive payment or benefit during the reasonable notice period.

With respect to the second question, the SCC noted that the terms of the agreement or plan will be strictly construed and must be absolutely clear and unambiguous in order to exclude the employee from the benefit. Language requiring an employee to be "full-time" or "active" will not suffice to remove an employee’s common law right to damages for an incentive payment. Additionally, language that removes an employee's common law right to damages upon termination will not suffice since, for the purpose of calculating wrongful dismissal damages, the employment contract is not treated as "terminated" until after the reasonable notice period has lapsed.

The Matthews decision therefore confirms that only clauses which are "absolutely clear and unambiguous" can deprive an employee of incentive payments or other benefits to which he or she would have been entitled during the notice of termination period. However, considering that the SCC provided only a few examples of language that would not suffice for the purposes of limiting such entitlements, the exact nature of the language that would be deemed sufficient to this end remains uncertain.

Key Points – Consequences for Employers in Québec

As a decision of the SCC, Matthews has authority in all jurisdictions in Canada, and this decision could therefore have important legal consequences in Québec. That being said, given that the case stems from a common law province, the SCC did not weigh the particularities of Québec civil law and did not consider Québec jurisprudence on the question of whether an employee should be entitled to receive the long term incentive awards which vested during the reasonable notice period.

Indeed, important distinctions exist between (i) the right to a notice of termination (délai-congé) or payment in lieu of notice pursuant to the Civil Code of Québec, and (ii) the common law implicit right to a reasonable notice of termination, during which the employment relationship is maintained.

Summary of Québec Civil Law Principles

In Québec, case law prior to Matthews recognizes that benefits and short-term incentive payments to which an employee is entitled in the course of employment, such as non-discretionary bonuses, must be included in the employee's remuneration for the purposes of calculating compensation in lieu of reasonable notice of termination of employment, to the extent that they constitute an "integral part" of the employee's remuneration.

Moreover, the majority of Québec civil law authorities, including the Québec Court of Appeal, consider that a long-term incentive plan, such as a stock option plan, can be distinguished from short-term incentive plans. Indeed, insofar as the main objective of a long-term incentive plan is to encourage an employee to remain employed by an employer on a prospective basis (rather than to compensate the employee for the work performed), this type of plan is not necessarily deemed to be an integral part of an employee's compensation. Therefore, a provision in a long-term incentive plan limiting the employee's entitlement to awards that would have vested during the reasonable notice period may be valid, if not abusive and provided that the exclusion is written in clear language[3].

Part 1 of the SCC Test

The SCC in Matthews adopts a test that places less emphasis on whether an incentive is an integral part of compensation. Indeed, the first part of the test articulated by the SCC primarily involves determining whether the employee would have received the incentive payment "if he or she had remained at work" during the reasonable notice period.

It should be noted, however, that one of the important differences between the right to reasonable notice at common law and under civil law is that in Québec, an employer has the option of immediately terminate the employment contract by paying compensation in lieu of notice.

In Matthews, the SCC noted that at common law, 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 his dismissal". There is therefore a common law right to "working" notice; failure by the employer to give the employee "working" notice constitutes a breach giving rise to damages.

On the other hand, in Québec, the employer has the choice of either giving a working notice of termination or a payment in lieu of notice; opting for payment in lieu of notice does not constitute a breach or a fault. In Québec (Commission des normes du travail) v. Asphalte Desjardins inc.[4], the SCC recognized that article 2092 of the Civil Code of Québec confirms "the legitimacy of the practice according to which an employer gives an employee an indemnity if the employer wants to terminate the employee’s contract immediately" [our emphasis]. 

Given this framework, Québec courts will be called upon to consider whether the first part of the test enacted by the SCC at common law will have to be adapted to take into account the specificities of civil law.

Part 2 of the SCC Test

The second part of the SCC's test involves determining whether the terms of the employment contract or incentive payment plan unambiguously eliminate or limit the employee's right to receive the incentive payment that would otherwise have been received during the notice period.

In Québec, with respect to incentive payments or benefits that are "integral" to the employee’s compensation, such as non-discretionary bonuses, the employer cannot contractually limit the employee's right to receive this type of compensation for the purposes of the indemnity in lieu of reasonable notice of termination, pursuant to article 2092 of the Civil Code of Québec[5]. In these circumstances, the second part of the SCC's test appears difficult to reconcile with the Civil Code of Québec, when dealing with non‑discretionary short-term incentive payments (bonuses).

That being said, until now, the majority of decisions of the Court of Appeal of Québec have accepted to exclude long-term incentive payments from the notice of termination based on the objective of such programs (notably employee retention) and provided that the plan’s language is sufficiently clear and not abusive. We do not believe that, in Québec, the SCC's decision should have the effect of precluding in all cases the exclusion of long-term incentive payments that would have become due during the reasonable notice period.

While waiting for the Québec courts to rule on these issues, employers should carefully review the terms of their long-term incentive plans and consider reformulating their exclusion clauses to ensure that they produce the desired effects.


[1] The summary of the facts was inspired from the blog written by our colleagues Gary T. Clarke, David M. Price, and Maja Blanchette.

[2] The summary of the findings of the SCC was inspired from the blog written by our colleagues Gary T. Clarke, David M. Price, and Maja Blanchette.

[3]Château inc. (Le) v. Niro, 2009 QCCA 2314; IBM Canada Ltd. v. D.C. , 2014 QCCA 1320; Premier Tech ltée v. Dollo, 2015 QCCA 1159; Leyne v. PSP Investments, 2020 QCCS 240.

[4]Québec (Commission des normes du travail) v. Asphalte Desjardins inc., 2014 SCC 5. Also : Château inc. (Le) v. Niro, 2009 QCCA 2314.

[5]Melanson v. Groupe Cantrex Nationwide, 2014 QCCS 394; Leyne v. PSP Investments, 2020 QCCS 240.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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