As the holiday season approaches, it is a good time to revisit lessons from highly pertinent employment law cases. One case that stands out is Matthews v. Ocean Nutrition Canada Ltd. (“Matthews”), which serves as a key reminder for employers regarding bonuses, commissions, and shares potentially owed to employees after termination. Although this case was decided a few years ago, the principles remain highly relevant, particularly during the end of the year when many employers are planning reviews of compensation plans for the following year and paying out holiday bonuses.
Matthews clarified how courts assess entitlement to compensation during the reasonable notice period post-termination, including shares that vest, commissions earned, and other bonuses owed during that time. Let’s dive into what this means for your business.
The Case: Matthews v. Ocean Nutrition Canada Ltd.
In this case, Mr. Matthews had worked for Ocean Nutrition for over 14 years before being constructively dismissed. His employment contract included participation in a long-term incentive plan (LTIP), which provided payouts upon the sale of the company if certain conditions were met. Shortly after his termination, Ocean Nutrition was sold, and Mr. Matthews sought payment under the LTIP for his share of the sale proceeds. The company argued he was not entitled to it, citing contract clauses that excluded payment to individuals no longer employed at the time of the sale.
The Supreme Court of Canada disagreed. It held that Mr. Matthews was entitled to damages equivalent to the LTIP payout because the bonus would have been earned during the reasonable notice period. Importantly, the Court found that clauses attempting to limit such entitlements must be clear, unambiguous, and enforceable. If an employee would have received the payment had they not been terminated, they are generally entitled to damages reflecting that payment.
Key Lessons for Employers
1. Clear and Enforceable Bonus Clauses
If your business uses bonuses, shares, or other forms of incentive compensation, have a lawyer review your contracts carefully. Courts will closely scrutinize any language that attempts to limit entitlement to these benefits after termination. Ambiguous terms will likely be interpreted in favour of the employee.
2. Reasonable Notice Periods Include More Than Base Pay
When calculating damages during the reasonable notice period, courts consider all forms of compensation the employee would have received, including:
- Salaries
- Bonuses (including holiday bonuses)
- Commissions
- Stock options and other equity awards
Employers must account for these elements when negotiating termination packages or preparing for litigation. Ignoring these components can lead to significant financial exposure.
3. Holiday Bonuses and End-of-Year Compensation
The timing of termination is critical if the reasonable notice period is inclusive of the holiday season, as many businesses pay out bonuses and commissions at this time. If an employee would have received a holiday bonus or end-of-year incentive during their reasonable notice period, they may be entitled to damages equivalent to that payment. To avoid surprises, ensure that your policies around holiday bonuses are documented and clearly communicated.
Proactive Steps for Employers
Here’s how you can manage these risks:
- Review Employment Agreements: Ensure your contracts and policies are up-to-date, clear, and enforceable. Include specific terms around bonuses, shares, and commissions during and after employment.
- Communicate Policies Clearly: Avoid confusion by explicitly outlining eligibility and forfeiture conditions in employee communications.
- Seek Legal Advice: When in doubt, consult with an employment lawyer to review your agreements and practices.
Final Thoughts
The holiday season is a time for reflection and planning, not only for employees but also for businesses. By understanding the lessons from cases like Matthews, employers can minimize risks and ensure they are treating employees fairly during terminations. If you have questions about how this case or these principles apply to your workplace, feel free to reach out for tailored advice. After all, a little preparation now can prevent bigger headaches down the road.
