Supreme Court to Hear Appeal in Forfeiture Clause Case
It has been increasingly common, for some time now, for long term incentive plans (LTIPs) and bonus plans to include 'forfeiture' clauses: If you are not actively employed as at the date when the bonus is paid out, or when your stock options vest, etc., you have no entitlement under the plan.
In other words, if you're working for your employer for years and years, and finally a million dollars worth of stock options are going to vest on June 1, but you resign your employment on May 31, you get nothing. Or if you're fired for cause on May 31. Or if you're dismissed on working notice, with an end date of May 31.
The ongoing legal controversy has been what happens in the event of a not-for-cause dismissal without notice.
There is a tension here: On the one hand, in the absence of an express contractual term to the contrary, employees are entitled to reasonable notice of dismissal pursuant to an implied term of the employment contract, or pay in lieu thereof. Therefore, an employee is ordinarily able to say "I should get all the money I would have gotten had I been employed through the entire notice period."
On the other hand, these forfeiture clauses typically indicate that the benefit has been provided to the employee with the express caveat that they are only payable if the employee is still working at the time of the payout. Therefore, the employee has agreed that he has no entitlement to the LTIP after termination.
So does the agreement to waive LTIP benefits if no longer actively employed supersede the entitlement to pay in lieu of notice? Or does the underlying assumption of pay in lieu of notice - how much would the employee have gotten IF still actively employed - continue to operate notwithstanding the forfeiture clause?
In Alberta, the courts have tended to side with the employer in these cases. (See, for example, Carroll v. ATCO and Styles v. AIMCo.) Alberta employees are seen as agreeing that LTIP benefits subject to a forfeiture clause will not form part of wrongful dismissal damages.
In British Columbia, the trend appears to be the opposite. (See, for example, Iacobucci v. WIC and Gillies v. Goldman Sachs.) Pursuant to the first principles of damages, an employee is entitled to be put into the position he or she would have occupied had the employer complied with its contractual obligations - i.e. by giving the employee reasonable notice and keeping him or her actively employed through the reasonable notice period.
In Ontario, the case law has been varied. In a number of fact-based scenarios, the courts have found that forfeiture clauses were ineffective. For instance, in Poole v. Whirlpool, the courts concluded that the employee had not received notice of the forfeiture clause. In Sandhu v. Solutions 2 Go, where the employee's statutory minimum notice period carried her past the payout date, the Superior Court of Justice concluded that the forfeiture clause constituted an impermissible attempt to contract out of the employer's statutory minimum obligations, and was therefore void.
Outside of such fact-specific findings, however, the courts have gone back and forth. In the 2004 case of Kieran v. Ingram Micro, and the 2011 case of Love v. Acuity Investments, the Court of Appeal applied analyses similar to that in Alberta. In Taggart v. Canada Life in 2006, Bernier v. Nygard in 2013, and Paquette v. TeraGo in 2016, the Ontario Court of Appeal adopted an approach similar to that of British Columbia.
Mr. Matthews was constructively dismissed. I will not go into the details of the constructive dismissal; both the trial court and appellate court agreed that he had been, and it is not the critical issue in this case. When a constructive dismissal occurs, the employer is deemed to have repudiated the contract, and is liable for damages on the same basis as if it had actually dismissed the employee without notice.
Mr. Matthews sought - and found - a new job, and resigned in response to the constructive dismissal. Because he was making similar amounts of money from his new job, he would have been said to have 'mitigated' his loss resulting from the constructive dismissal by Ocean Nutrition. As such, the only thing he tried to negotiate with the employer at the time was preservation of his entitlements under an LTIP which would give him a substantial monetary entitlement in the event of a sale of the company, but required him to be a full time employee at the time of the sale. The company would not consider agreeing to such a term unless he executed a non-competition agreement, which would have interfered with Mr. Matthews' new job, so they reached no such agreement.
But then, approximately 13 months after the constructive dismissal, Ocean Nutrition was sold, on terms that would have made Mr. Matthews' benefit under the LTIP worth over a million dollars.
The relevant provisions of the LTIP, for our purposes, are as follows:
The Supreme Court of Nova Scotia found that he had been constructively dismissed, that his reasonable notice period was 15 months, and that the language in the LTIP was not sufficient to exclude his entitlement to be compensated for its loss over the reasonable notice period.
However, a majority of the Nova Scotia Court of Appeal allowed Ocean Nutrition's appeal, following Kieran and Styles.
Recently, the Supreme Court of Canada granted Mr. Matthews leave to appeal
In 2014, the Supreme Court of Canada released its decision in Bhasin v. Hrynew. This was a major decision for contract law generally, recognizing good faith performance as an 'organizing principle' of contract law. The full impact of Bhasin is, perhaps, yet to be seen, but its core appears to be that parties to a contract are entitled to expect the other parties to refrain from acting in a way that is deceitful or deceptive in respect of their contractual performance.
Mr. Matthews, throughout, has made arguments based on Bhasin in support of his position: Essentially, the argument goes that the employer may not dismiss him in bad faith to deny him his benefit under the LTIP. At first instance, Justice Leblanc rejected the argument, but found that he was entitled to the benefit anyways.
At the Court of Appeal, Justice Scanlan's dissenting reasons considered Bhasin at length, ultimately concluding that the employer conduct that created the constructive dismissal was in the nature of the dishonest and bad faith conduct that runs awry of the Bhasin principles, and accordingly that the constructive dismissal is not a 'termination' as contemplated by the LTIP's forfeiture clause.
The majority, however, concluded that, because the employer's misconduct was not found to be with the specific intention of denying Mr. Matthews recovery under the LTIP, bad faith principles aren't applicable to the issue. They further describe Justice Scanlan's differentiation between 'severance' and 'damages' as "a distinction without difference".
Matthews' application for leave to appeal to the Supreme Court focuses heavily on the implications of Bhasin, arguing that the majority of the Nova Scotia Court of Appeal applied a "pre-Bhasin" framework, and that giving effect to Bhasin would require the courts to recognize that the loss of the LTIP flowed from Ocean's dishonest performance of its contractual duties.
However, the third issue identified in Matthews' application for leave is, in the respectful opinion of the author, where the real meat in this case lies, asking the Court to resolve the different approaches taken by different courts, which will be addressed below.
There are two rather fundamental problems with applying Bhasin in this case:
The hearing judge, in my respectful opinion, got it completely right. Justice Scanlan's dissent touched upon some important principles, but focused more on Bhasin than was necessary.
(2) There's a Better Interpretation
On the other hand, these forfeiture clauses typically indicate that the benefit has been provided to the employee with the express caveat that they are only payable if the employee is still working at the time of the payout. Therefore, the employee has agreed that he has no entitlement to the LTIP after termination.
So does the agreement to waive LTIP benefits if no longer actively employed supersede the entitlement to pay in lieu of notice? Or does the underlying assumption of pay in lieu of notice - how much would the employee have gotten IF still actively employed - continue to operate notwithstanding the forfeiture clause?
A Range of Decisions
In Alberta, the courts have tended to side with the employer in these cases. (See, for example, Carroll v. ATCO and Styles v. AIMCo.) Alberta employees are seen as agreeing that LTIP benefits subject to a forfeiture clause will not form part of wrongful dismissal damages.
In British Columbia, the trend appears to be the opposite. (See, for example, Iacobucci v. WIC and Gillies v. Goldman Sachs.) Pursuant to the first principles of damages, an employee is entitled to be put into the position he or she would have occupied had the employer complied with its contractual obligations - i.e. by giving the employee reasonable notice and keeping him or her actively employed through the reasonable notice period.
In Ontario, the case law has been varied. In a number of fact-based scenarios, the courts have found that forfeiture clauses were ineffective. For instance, in Poole v. Whirlpool, the courts concluded that the employee had not received notice of the forfeiture clause. In Sandhu v. Solutions 2 Go, where the employee's statutory minimum notice period carried her past the payout date, the Superior Court of Justice concluded that the forfeiture clause constituted an impermissible attempt to contract out of the employer's statutory minimum obligations, and was therefore void.
Outside of such fact-specific findings, however, the courts have gone back and forth. In the 2004 case of Kieran v. Ingram Micro, and the 2011 case of Love v. Acuity Investments, the Court of Appeal applied analyses similar to that in Alberta. In Taggart v. Canada Life in 2006, Bernier v. Nygard in 2013, and Paquette v. TeraGo in 2016, the Ontario Court of Appeal adopted an approach similar to that of British Columbia.
The Case Under Appeal: Matthews v. Ocean Nutrition
Mr. Matthews was constructively dismissed. I will not go into the details of the constructive dismissal; both the trial court and appellate court agreed that he had been, and it is not the critical issue in this case. When a constructive dismissal occurs, the employer is deemed to have repudiated the contract, and is liable for damages on the same basis as if it had actually dismissed the employee without notice.
Mr. Matthews sought - and found - a new job, and resigned in response to the constructive dismissal. Because he was making similar amounts of money from his new job, he would have been said to have 'mitigated' his loss resulting from the constructive dismissal by Ocean Nutrition. As such, the only thing he tried to negotiate with the employer at the time was preservation of his entitlements under an LTIP which would give him a substantial monetary entitlement in the event of a sale of the company, but required him to be a full time employee at the time of the sale. The company would not consider agreeing to such a term unless he executed a non-competition agreement, which would have interfered with Mr. Matthews' new job, so they reached no such agreement.
But then, approximately 13 months after the constructive dismissal, Ocean Nutrition was sold, on terms that would have made Mr. Matthews' benefit under the LTIP worth over a million dollars.
The relevant provisions of the LTIP, for our purposes, are as follows:
2.03: 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: 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.(It bears noting that there were additional special treatments contemplated: For instance, an employee terminated in conjunction with a realization event would be deemed to be an employee at the time of the realization event.)
The Supreme Court of Nova Scotia found that he had been constructively dismissed, that his reasonable notice period was 15 months, and that the language in the LTIP was not sufficient to exclude his entitlement to be compensated for its loss over the reasonable notice period.
However, a majority of the Nova Scotia Court of Appeal allowed Ocean Nutrition's appeal, following Kieran and Styles.
Recently, the Supreme Court of Canada granted Mr. Matthews leave to appeal
Bhasin: A Revolution in Employment Law? Or an Elusive Red Herring?
In 2014, the Supreme Court of Canada released its decision in Bhasin v. Hrynew. This was a major decision for contract law generally, recognizing good faith performance as an 'organizing principle' of contract law. The full impact of Bhasin is, perhaps, yet to be seen, but its core appears to be that parties to a contract are entitled to expect the other parties to refrain from acting in a way that is deceitful or deceptive in respect of their contractual performance.
Mr. Matthews, throughout, has made arguments based on Bhasin in support of his position: Essentially, the argument goes that the employer may not dismiss him in bad faith to deny him his benefit under the LTIP. At first instance, Justice Leblanc rejected the argument, but found that he was entitled to the benefit anyways.
At the Court of Appeal, Justice Scanlan's dissenting reasons considered Bhasin at length, ultimately concluding that the employer conduct that created the constructive dismissal was in the nature of the dishonest and bad faith conduct that runs awry of the Bhasin principles, and accordingly that the constructive dismissal is not a 'termination' as contemplated by the LTIP's forfeiture clause.
The dismissal, as engineered by Emond, is not a termination as contemplated in the LTIP nor in accordance with the law of employment contracts.Justice Scanlan further highlighted: "To put it more succinctly, even if the LTIP could not be used to calculate severance, it is available to calculate damages as the hearing judge did in this case."
The majority, however, concluded that, because the employer's misconduct was not found to be with the specific intention of denying Mr. Matthews recovery under the LTIP, bad faith principles aren't applicable to the issue. They further describe Justice Scanlan's differentiation between 'severance' and 'damages' as "a distinction without difference".
Matthews' application for leave to appeal to the Supreme Court focuses heavily on the implications of Bhasin, arguing that the majority of the Nova Scotia Court of Appeal applied a "pre-Bhasin" framework, and that giving effect to Bhasin would require the courts to recognize that the loss of the LTIP flowed from Ocean's dishonest performance of its contractual duties.
However, the third issue identified in Matthews' application for leave is, in the respectful opinion of the author, where the real meat in this case lies, asking the Court to resolve the different approaches taken by different courts, which will be addressed below.
There are two rather fundamental problems with applying Bhasin in this case:
- Employment law doctrines already heavily account for the public policy principles underlying Bhasin. Between the employee's common law duties of fidelity and loyalty, the employer's duties of good faith and fair dealing, and the constructive dismissal doctrine, there's an open question as to how much Bhasin changes employment law, if at all.
Matthews' counsel points out that the duty of good faith and fair dealing, as it existed prior to Bhasin, only applied to circumstances surrounding termination. While that is strictly true, it has been an academic distinction. The duty has been interpreted in a sufficiently broad manner that there have been few if any post-Wallace cases where an employer's bad faith conduct was not found to violate its duty of good faith and fair dealing. However, since Honda, remedies for bad faith conduct have been very difficult to come by.
In other words, the conduct which Matthews claims violates the employer's Bhasin duties were probably also violations of duties that the employer owed even before Bhasin. The implication of Matthews' argument would be that Bhasin creates a new framework for remedies of bad faith conduct - a contention which seems fairly strained on the face of Bhasin. - The arguments that damages flow from the employer's "dishonest performance" of its contractual duties would seem to ignore the fact that the employer did not, in fact, perform its contractual duties. Indeed, the employer breached its contractual obligations, by constructively dismissing Mr. Matthews without notice.
Bhasin would seem to deal with a scenario where the parties have strictly complied with their obligations under the contract, and yet the factual matrix nonetheless cries out for a remedy flowing from the dishonest or bad faith conduct of one party. Where that party has breached the other express or implied terms of the employment contract, there would not generally appear to be much room to apply Bhasin.
The corollary of this point, however, is that one need not apply Bhasin to get to a finding that Mr. Matthews is entitled to the value of the LTIP.
Commentary: A Careful First Principles Analysis
The hearing judge, in my respectful opinion, got it completely right. Justice Scanlan's dissent touched upon some important principles, but focused more on Bhasin than was necessary.
Notwithstanding certain Alberta Court of Appeal decisions, the law through most of the country has long been clear as to how wrongful dismissal damages work: Where there is no express contractual term to the contrary, it is an implied term of the employment contract that neither party will terminate the contract without reasonable notice. When an employer terminates the contract without reasonable notice, this is a breach of contract, entitling the employee to "damages" sufficient to put him into the same position he would have occupied had he been given reasonable notice instead.
The fact that this money is in the nature of "damages" is important. It is not salary or wages. It is not money owing under the contract of employment. The termination of the employment contract, itself, terminated the employee's rights to earn wages or other monies under the contract. This has implications for tax purposes, mitigation purposes, and others. If I am suing on a contractual clause that provides me a specific amount of pay in lieu of notice (which happens), then I am seeking a liquidated sum under the contract with very different treatments for tax purposes, and which is not subject to a duty to mitigate.
The fact that this money is in the nature of "damages" is important. It is not salary or wages. It is not money owing under the contract of employment. The termination of the employment contract, itself, terminated the employee's rights to earn wages or other monies under the contract. This has implications for tax purposes, mitigation purposes, and others. If I am suing on a contractual clause that provides me a specific amount of pay in lieu of notice (which happens), then I am seeking a liquidated sum under the contract with very different treatments for tax purposes, and which is not subject to a duty to mitigate.
As a matter of characterization, what this means is that Mr. Matthews is not seeking to enforce the LTIP. Under the terms of the LTIP, he clearly lost any entitlement under that plan. That's fairly straightforward, and probably uncontroversial.
But he lost that entitlement because of the employer's breach of contract, being the constructive dismissal without reasonable notice. You don't need to chalk it up to a breach of a novel duty of good faith; this logic goes to a long-standing constructive dismissal doctrine. This loss was a foreseeable consequence of the employer's breach of contract, and so his loss of entitlement under the LTIP is compensable as damages against the employer - not pursuant to the terms of the LTIP or the employment contract, but as compensation for the foreseeable losses flowing from the breach of the employment contract.
So on a first principles analysis, Matthews has a prima facie entitlement to damages for the loss of the LTIP.
The remaining question is whether or not anything changes that prima facie entitlement. There is nothing in either contract that purports to entitle the employer to terminate the employment contract. So does anything effectively purport to modify Mr. Matthews' entitlements to the damages that ostensibly flow from a breach of contract?
A closer reading of the language of the LTIP is called for.
"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."
As noted above, Matthews' claim for damages does not arise "under" the LTIP. It arises for breach of the employment contract.
This is not an academic distinction. In wrongful dismissal, the employee will sue the employer for all damages flowing from the breach; this can include damages that arise through loss of benefits provided by third parties that are ancillary to the employment contract - including benefits pursuant to pension plans, insurance policies, or gratuities. A dismissed employee will not usually sue the pension plan for the pension benefits to which he would have been entitled under the plan had he not been dismissed without notice; he sues his employer on the basis that the loss of those benefits flows from the breach of the employment contract. It is not necessary (or even commonly true) that the employer has any direct liability under the pension plan agreement itself.
The important thing to take away from this sentence is simple: Mr. Matthews would have had an entitlement under the LTIP had he received reasonable notice of termination, but because he did not receive reasonable notice of termination, he lost his entitlement under the plan.
This doesn't undermine his claim for damages; this is a necessary prerequisite for his claim for damages.
"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."
Greater certainty is good. But rendering this Agreement "of no force and effect" does not purport to modify the damages to which Mr. Matthews is entitled flowing from wrongful dismissal. While it contemplates that the voiding of his benefits under the Agreement occurs regardless of why he was terminated, at no point does this provision speak to a breach of the employment contract by the employer. (It would be a fair reading of this provision that, if the employer terminated the employee on reasonable notice, and that reasonable notice period expired prior to the 'realization event', the agreement would be void at the end date of the working notice period.)
"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."
This one, perhaps, is trickier. What exactly does it mean to exclude the potential for any calculation of the realization event "for any purpose" or "in any severance calculation"?
Strictly speaking, "severance" doesn't have any meaning at common law. In some Provinces (such as Ontario), there are scenarios where the statute requires payment of an amount of "severance", and some contracts provide for payment of an amount of "severance". In either case, it would typically refer to a liquidated sum of money which must be provided as money under the terms of the contract or statute, and cannot be satisfied by provision of notice of termination. Neither one of those meanings has any application here.
At its lowest, it means nothing; it might be seen as referring to employment contracts that provide a formula for severance payments - and perhaps other employees of this employer had such provisions in their contracts.
The counter-argument would go that it was understood to refer to 'pay in lieu of notice', which is itself a 'quick and dirty' way of describing damages flowing from an improper termination without notice. So, the employer argues, Mr. Matthews agreed not to claim any value for the benefit in respect of damages for wrongful dismissal.
That's one possible interpretation of the provision. The trouble is four-fold.
(1) Waiver Requires More
Firstly, the employer's argument is, in effect, that this language amounts to a waiver of damages (In the event that we breach that other contract, you agree as part of this contract to limit your damages flowing from that breach), and traditionally waiver requires a much higher degree of clarity as to what is being waived and under what circumstances. To amount to an effective waiver, the language would need to spell out in a much clearer way that it does indeed speak to a scenario where the employer has breached the employment contract.
(1) Waiver Requires More
Firstly, the employer's argument is, in effect, that this language amounts to a waiver of damages (In the event that we breach that other contract, you agree as part of this contract to limit your damages flowing from that breach), and traditionally waiver requires a much higher degree of clarity as to what is being waived and under what circumstances. To amount to an effective waiver, the language would need to spell out in a much clearer way that it does indeed speak to a scenario where the employer has breached the employment contract.
(2) There's a Better Interpretation
Secondly, it's not the only possible interpretation - and contra proferentem works to Mr. Matthews' benefit: Ambiguity in a contract is to be interpreted against the interests of the party that drafted it.
In many forfeiture clause cases, there are questions of pro-rating or partial benefits under bonus or equity plans. If I have stock options that vest after 10 years, and I quit after 7, should I get 70% of the options? If I have an annual bonus accruing from January to December, and I quit at the end of June, should I get half the annual bonus? One effect of forfeiture clauses which is almost certainly going to be effective in most circumstances is the prevention of partial accrual prior to the expressed vesting date.
In this case, what this language really appears to exclude is an equity-based argument: Yes, I resigned voluntarily, but my participation in the LTIP means that I'm entitled to .03% of the equity in the company, and I want to be bought out. Rather, Mr. Matthews' interest in the LTIP had a value of exactly $0.00 until the company was sold, at which point it became valued at over $1 million.
The limitation of this language to dates "other than on the date of the Realization Event" makes this the most likely interpretation of the language. And because the Realization Event occurred within Mr. Matthews' reasonable notice period, the employer cannot rely on this language to assert an exclusion from his damage calculation through the reasonable notice period.
(3) If it were a waiver, that waiver would be nullified by its own terms
The third reason that the employer's interpretation of Clause 2.05 should fail...is Clause 2.03: "For greater certainty, this Agreement shall be of no force or effect if the employee ceases to be an employee of ONC...."
Remember: Matthews isn't trying to enforce the LTIP agreement. He can and should accept that his constructive dismissal and resignation disentitle him to any benefit under the LTIP agreement, and argue strictly that this disentitlement is a compensable loss.
The employer, by contrast, wants to rely on the LTIP and enforce its terms (specifically, the ones it says relieve it of liability), even though, on the face of the agreement, the terms of the LTIP are of no force and effect post-termination.
(4) There's a Machtinger problem
In the 1992 case of Machtinger v. HOJ Industries, the Supreme Court of Canada looked at a scenario where an employment contract purported to permit the termination of an employee with less notice than the minimum permitted under the applicable employment standards statute. The Court concluded that the term was void, leaving intact the common law implied term of reasonable notice.
This has evolved since then. There have been decisions by a number of appellate courts (such as Shore v. Ladner Downs in British Columbia or the Wunderman case in Ontario) finding that the Machtinger voiding mechanism - which arises from the language of employment standards statutes across the country - operates to void non-compliant language ab initio: In other words, if language generates scenarios where an employer may be able to terminate without providing the employee's statutory minimums, that language is void.
Consider that proposition in context of Sandhu v. Solutions 2 Go, described above.
In Nova Scotia, the governing statute is the Labour Standards Code. When an employer terminates an employee, then under most circumstances there is a formula that sets out the minimum statutory notice, and employer dismissing without notice will be required to pay "an amount equal to all pay to which he would have been entitled for work that would have been performed by him at the regular rate in a normal, non-overtime work week for the period of notice prescribed...".
Does "pay" include the benefit under the LTIP? Probably. In the definitions under the Code, "pay" is defined broadly with reference to "wages", and "wages" is defined very broadly to capture compensation "in any form" for services, calculated by any means.
So if one envisions a Sandhu scenario where an employee entitled to a statutory minimum of 8 weeks, and is dismissed without notice less than 8 weeks before the "Realization Event" under the LTIP, then there is a strong probability that the statute would serve to guarantee the benefit under the LTIP, rendering any agreement to 'waive' the benefit in that period void.
In other words, if the language means what the employer says it means, then the language would necessarily be void ab initio by operation of the Labour Standards Code.
In 1986, the Alberta Court of Appeal released a strange little decision in Athwal v. Edmonton.
Mr. Athwal was dismissed 12.5 months before the vesting of a pension benefit. The City conceded a reasonable notice period of 10-12 months, but objected to the trial judge's finding of a 13-month notice period, carrying the employee over the vesting date. In other words, the City's position was that, had it given reasonable notice, the effective termination date would still have been before the pension vesting date.
The Court of Appeal found it was not consistent with the reasonable expectations of the parties that the employee would be terminated without cause, but even on notice, on the eve of the vesting of a significant benefit, and found that it would be appropriate to slightly extend the notice period on that basis.
As noted above, there is an open question as to whether Bhasin fills any holes in the pre-existing employment law framework. If it does, it would likely be narrow and limited.
There should be no question that, subject to statutory considerations, parties should be entitled to contract out of wrongful dismissal entitlements. As a practical matter, this is easier to do in the employment contract itself, but sufficiently express 'waiver' language, properly drafted, may well be able to do the job. (This should be a high bar, sufficient that an employee can look at it and fully understand what it is intended to do: The employer is reserving a right to unilaterally and arbitrarily deny you any right to the benefit, without notice or cause. I've never seen an LTIP that boils down the exclusion in such stark terms, and frankly I wouldn't expect to see it; it would substantially undermine the purpose of LTIPs if employees understood just how precarious such an entitlement really is.)
But Mr. Matthews' contention that bad faith employer conduct should abrogate contractual exclusions? That would be a difficult proposition to reconcile with existing law, as a general proposition.
There may be cases, however, at the outer margins, where Bhasin might have an impact. The most straightforward would be scenarios where the termination decision was made with the intention of undermining the employee's benefit. (The hearing judge concluded that this was not the case here.) Even then, there are going to be a lot of shades of grey. What if the termination decision and/or timing was merely partly influenced by avoiding paying out the benefit, while also being driven by other legitimate business concerns?
Or perhaps the good faith obligations imposed by Bhasin (not to mention Wallace and Honda) result in a scenario where the employer might reasonably be expected to make its termination decisions with due consideration for its impact on substantially-earned benefits, a la Athwal.
But application of amorphous principles of good faith to inform substantive contractual obligations, particularly in an area of law that already has significant protections for employees, should be done with great caution, and only where absolutely necessary. In my respectful view, Matthews is not a case to do so - in part because there are so many ways of getting there on conventional wrongful dismissal principles...and also in part because if there weren't a way to get there using these conventional principles, that would leave an open question as to whether or not we should get to that result.
*****
Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
(3) If it were a waiver, that waiver would be nullified by its own terms
The third reason that the employer's interpretation of Clause 2.05 should fail...is Clause 2.03: "For greater certainty, this Agreement shall be of no force or effect if the employee ceases to be an employee of ONC...."
Remember: Matthews isn't trying to enforce the LTIP agreement. He can and should accept that his constructive dismissal and resignation disentitle him to any benefit under the LTIP agreement, and argue strictly that this disentitlement is a compensable loss.
The employer, by contrast, wants to rely on the LTIP and enforce its terms (specifically, the ones it says relieve it of liability), even though, on the face of the agreement, the terms of the LTIP are of no force and effect post-termination.
(4) There's a Machtinger problem
In the 1992 case of Machtinger v. HOJ Industries, the Supreme Court of Canada looked at a scenario where an employment contract purported to permit the termination of an employee with less notice than the minimum permitted under the applicable employment standards statute. The Court concluded that the term was void, leaving intact the common law implied term of reasonable notice.
This has evolved since then. There have been decisions by a number of appellate courts (such as Shore v. Ladner Downs in British Columbia or the Wunderman case in Ontario) finding that the Machtinger voiding mechanism - which arises from the language of employment standards statutes across the country - operates to void non-compliant language ab initio: In other words, if language generates scenarios where an employer may be able to terminate without providing the employee's statutory minimums, that language is void.
Consider that proposition in context of Sandhu v. Solutions 2 Go, described above.
In Nova Scotia, the governing statute is the Labour Standards Code. When an employer terminates an employee, then under most circumstances there is a formula that sets out the minimum statutory notice, and employer dismissing without notice will be required to pay "an amount equal to all pay to which he would have been entitled for work that would have been performed by him at the regular rate in a normal, non-overtime work week for the period of notice prescribed...".
Does "pay" include the benefit under the LTIP? Probably. In the definitions under the Code, "pay" is defined broadly with reference to "wages", and "wages" is defined very broadly to capture compensation "in any form" for services, calculated by any means.
So if one envisions a Sandhu scenario where an employee entitled to a statutory minimum of 8 weeks, and is dismissed without notice less than 8 weeks before the "Realization Event" under the LTIP, then there is a strong probability that the statute would serve to guarantee the benefit under the LTIP, rendering any agreement to 'waive' the benefit in that period void.
In other words, if the language means what the employer says it means, then the language would necessarily be void ab initio by operation of the Labour Standards Code.
The Residual Impact of Bhasin
In 1986, the Alberta Court of Appeal released a strange little decision in Athwal v. Edmonton.
Mr. Athwal was dismissed 12.5 months before the vesting of a pension benefit. The City conceded a reasonable notice period of 10-12 months, but objected to the trial judge's finding of a 13-month notice period, carrying the employee over the vesting date. In other words, the City's position was that, had it given reasonable notice, the effective termination date would still have been before the pension vesting date.
The Court of Appeal found it was not consistent with the reasonable expectations of the parties that the employee would be terminated without cause, but even on notice, on the eve of the vesting of a significant benefit, and found that it would be appropriate to slightly extend the notice period on that basis.
As noted above, there is an open question as to whether Bhasin fills any holes in the pre-existing employment law framework. If it does, it would likely be narrow and limited.
There should be no question that, subject to statutory considerations, parties should be entitled to contract out of wrongful dismissal entitlements. As a practical matter, this is easier to do in the employment contract itself, but sufficiently express 'waiver' language, properly drafted, may well be able to do the job. (This should be a high bar, sufficient that an employee can look at it and fully understand what it is intended to do: The employer is reserving a right to unilaterally and arbitrarily deny you any right to the benefit, without notice or cause. I've never seen an LTIP that boils down the exclusion in such stark terms, and frankly I wouldn't expect to see it; it would substantially undermine the purpose of LTIPs if employees understood just how precarious such an entitlement really is.)
But Mr. Matthews' contention that bad faith employer conduct should abrogate contractual exclusions? That would be a difficult proposition to reconcile with existing law, as a general proposition.
There may be cases, however, at the outer margins, where Bhasin might have an impact. The most straightforward would be scenarios where the termination decision was made with the intention of undermining the employee's benefit. (The hearing judge concluded that this was not the case here.) Even then, there are going to be a lot of shades of grey. What if the termination decision and/or timing was merely partly influenced by avoiding paying out the benefit, while also being driven by other legitimate business concerns?
Or perhaps the good faith obligations imposed by Bhasin (not to mention Wallace and Honda) result in a scenario where the employer might reasonably be expected to make its termination decisions with due consideration for its impact on substantially-earned benefits, a la Athwal.
But application of amorphous principles of good faith to inform substantive contractual obligations, particularly in an area of law that already has significant protections for employees, should be done with great caution, and only where absolutely necessary. In my respectful view, Matthews is not a case to do so - in part because there are so many ways of getting there on conventional wrongful dismissal principles...and also in part because if there weren't a way to get there using these conventional principles, that would leave an open question as to whether or not we should get to that result.
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Dennis Buchanan is a lawyer practicing labour and employment law and civil litigation in Edmonton, Alberta.
This post does not contain legal advice, but only general legal information. It does not create a solicitor-client relationship with any readers. If you have a legal issue or potential issue, please consult a lawyer.
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