When Do Incentive Payments Apply After Termination?

November 19, 2019

Incentive Payments

Author: W. Shale Anderson

When Do Incentive Payments Apply After Termination?

In October 2019, the Supreme Court of Canada heard an appeal in Matthews v. Ocean Nutrition Canada Ltd. that could have far-reaching implications for Canadian employers relating to long and short-term incentive plans, bonuses, and other forms of non-salary compensation.

Mr. Matthews was employed by Ocean Nutrition and its predecessor companies from January 1997 to June 2011 when he successfully established that he had been constructively dismissed.

Are Ex-Employees Entitled to Incentive Payouts?

The notice period awarded to Mr. Matthews was not at issue. The crux of the appeal is whether Mr. Matthews is entitled to a payout of $1.1 million from a change of control clause (“realization event”) in his Long Term Incentive Plan (“LTIP”), despite not being an employee of Ocean Nutrition at the time the realization event occurred.

As part of his compensation, Mr. Matthews participated in Ocean Nutrition’s LTIP. Under the terms of the LTIP, if the company was sold while he was employed, he was entitled to receive a portion of the proceeds based on the formula contained in the LTIP.

Mr. Matthews was not an employee at the time of the realization event. However, the realization event occurred during his reasonable notice period. Mr. Matthews argued that because the realization event occurred during the reasonable notice period, he should be entitled to that which he would have earned had he still been employed with Ocean Nutrition.

The LTIP Plan contained this key paragraph:

“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.”

Mr. Matthews’s declaration of constructive dismissal occurred 13 months prior to the realization event. Similar to the circumstances in Styles v. AIMCO, 2017 ABCA 1, Ocean Nutrition’s plan requires that to be eligible for payment, the employee must be a full-time employee of Ocean Nutrition and that the entitlement under the LTIP will not apply to a payment in lieu of notice of termination of employment.

At trial, the Court granted Mr. Matthews the LTIP payment. The Nova Scotia Court of Appeal overturned the decision of the lower court, striking the LTIP entitlement from Mr. Matthew’s award and stating:

“The finding that Matthews was entitled to compensation under the Long Term Incentive Plan flies in the face of the very clear and unambiguous wording of the Agreement.  Whether Mr. Matthews resigned, or was dismissed without cause, once his employment terminated, any right he had to recover under the Long Term Incentive Plan ceased.”

The NSCA acknowledged that the outcome may have been different had Ocean Nutrition terminated Matthews expressly for the purpose of avoiding a liability under the plan, but this was not the case.

How to Protect Against Paying Incentive Amounts as Part of Termination Pay

In light of these decisions, employers may be asking what the best way is to protect against paying incentive amounts as part of termination pay. The answer may be found in a recent Alberta decision, Carroll v ATCO Electric Ltd, 2017 ABQB 267. In Carroll, the Court ruled that because the limiting language describing when an employee is no longer be eligible to receive their bonus was not sufficiently clear, that the employee would have been otherwise entitled to receive a bonus:

“unlike the stock option plan and SAR plan, it does not specify on which date in relation to termination the cessation takes effect: the date of notice, the last day of employment or the date on which the notice period concludes. It does not say anything about what happens during the notice period.”

Pending the outcome of the decision in Matthews v. Ocean Nutrition Canada Ltd., employers should consider revisiting the language that governs all aspects of their incentive plans and bonus regimes in order to ensure that the plan terms are extremely clear with respect to the applicability of such plans during a notice period.