Bonuses headed to the Supreme Court

Top court to hear Nova Scotia case on employment status and bonus entitlements

Bonuses headed to the Supreme Court
The validity of exclusion clauses which purport to limit access to specific parts of an employee’s compensation will be an issue before the Supreme Court of Canada. Mayuree Moonhirun/Shutterstock

In its recent decision in Dawe v. Equitable Life Insurance Company of Canada, the Ontario Court of Appeal had an opportunity to establish the law on entitlement to bonuses upon termination of an employment relationship. Depending on the decision in Matthews v. Ocean Nutrition Canada Limited, which will be heard by the Supreme Court of Canada in October, the law established in Dawe will be further clarified.

Michael Dawe was a long-term employee of the Equitable Life Insurance Company of Canada. Dawe had worked for the Equitable Life for 37 years. Over this period, he received many promotions and by the end of his tenure with the company, Dawe held the position and title of Senior Vice President. In 2015, Dawe purchased tickets to a sporting event and expensed them as part of his business development fund. The president of the company found out about the purchase and triggered an audit of the company’s entertainment and promotion expenses. Even though other members of senior management were purchasing sporting event tickets, Dawe was the only one who received a verbal reprimand. Dawe was later terminated without cause. Dawe filed a claim and brought a summary judgment motion, where he was awarded 30 months’ notice and the entirety of his bonus plan.

Court of Appeal reduces notice award

The Court of Appeal for Ontario reduced the summary judgment motion judge’s award of 30 months to 24 months. The court’s found that case law indicated that 24 months’ notice is the upper limit unless there are exceptional circumstances that would necessitate more notice. While what happened to Dawe was unfortunate, it did not meet the requirements of exceptional circumstances at law.

The Court of Appeal agreed that the bonuses formed an integral part of the Dawe’s compensation. The court held that the wording of the provisions was sufficiently clear regarding the consequences of a without cause termination for these bonus plans. Regardless, Equitable Life failed to bring these provisions to Dawe’s attention. As Dawe was not aware of these terms, the court found that it would be unconscionable to allow Equitable Life to enjoy the benefits of the exclusion clause. Thus, in Ontario, if an employee is not made aware of the exclusion clauses contained in a bonus plan, those exclusion clauses are rendered unenforceable at law.

Exclusion clauses and bonus plans

The issue of exclusion clauses in employment contracts came before the Supreme Court of Canada in 1992, in Machtinger v. Hoj Industries Ltd.  The Supreme Court stated that in order to contract out of a common law entitlement to reasonable notice, the employer and employee must contract for a clearly specified period of notice, whether expressly or impliedly. Further, in Bhasin v. Hrynew, the Supreme Court recognized an implied duty of honest performance in contracts.

Matthews v. Ocean Nutrition Ltd.

The validity of exclusion clauses which purport to limit access to specific parts of an employee’s compensation will be a live issue before the Supreme Court of Canada in Matthews v. Ocean Nutrition Ltd. The court will determine the proper role of both freedom of contract and the duty of honest performance.  In Matthews, a long-term senior employee was provided with a bonus package that purported to provide a lump-sum cash payment if the company were sold to new ownership. In an effort to avoid its obligations to the employee, the employer intentionally constructively dismissed him and sold the company afterwards. The employer has attempted to rely on an exclusion clause in the bonus plan, which stated that the payment of the bonus is only to take place if the employee is “actively employed.”

The Supreme Court’s decision in Matthews may clarify how exclusion clauses are to be interpreted in employment contracts. While the parties’ submissions heavily focus on the employer’s duty of good faith, some intervenors focus on the straight interpretation of the employment contract. It will be the first time the highest jurisdiction reviews executive compensation plans and its decision will shape the landscape of employment incentives.

For more information see:

  • Dawe v. Equitable Life Insurance Company of Canada, 2019 ONCA 512 (Ont. C.A.).
  • Machtinger v. Hoj Industries Ltd., 1 S.C.R. 986 (S.C.C.).
  • Bhasin v. Hrynew, 2014 SCC 71 (S.C.C.).
  • Matthews v. Ocean Nutrition Ltd., 2018 NSCA 44 (N.S. C.A.).

Walter Yoo is an employment lawyer with Monkhouse Law in Toronto. He can be reached at (416) 907-9249 ext. 234 or [email protected]

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