In a recent Supreme Court of Canada decision, the court awarded a constructively dismissed employee a $1.1 million bonus he would have been entitled to during his reasonable notice period.
Constructively Dismissed Employee Claims Bonus
Beginning in 1997, the employee occupied several senior management positions with the employer, a nutritional supplement company. As a senior executive, the employee was part of the employer’s long term incentive plan (“LTIP”), a contractual arrangement designed to reward employees for their previous contributions and to provide an incentive to continue contributing to the company’s success.
Under the LTIP, a “Realization Event”, such as the sale of the company, would trigger payments to employees who qualified under the plan.
In 2007, the employer hired a new Chief Operating Officer, who began a campaign to marginalize the employee within the company, limiting his responsibilities and lying to him about his status and prospects with the employer. Despite the employee’s problems with senior management, he stayed with the employer, anticipating that it would soon be sold at which point he would receive the LTIP payout. However, the employee eventually left the employer in June 2011, taking another job.
About 13 months after the employee’s departure, the company was sold for $540 million. The sale constituted a Realization Event for the purposes of the LTIP.
However, because the employee was no longer actively employed on that date, the employer took the position that he did not satisfy the terms of the LTIP, and refused to issue payment to the employee.
Consequently, the employee brought a claim against the employer alleging that he had been constructively dismissed, and that the constructive dismissal was carried out in bad faith and in breach of the employer’s duty of good faith.
At trial, the judge concluded that the employer had constructively dismissed the employee and that he was owed a reasonable notice period of 15 months. The trial judge also held that the employee would have been a full‑time employee when the Realization Event occurred had he not been constructively dismissed, and that, because the terms of the LTIP did not unambiguously limit or remove his common law right to damages, the employee was entitled to damages equivalent to what he would have received under the LTIP.
As a result, the trial judge found that the employee was entitled to receive approximately $1.1 million under the LTIP. The employer appealed the decision.
On appeal, the Nova Scotia Court of Appeal unanimously upheld the decision that the employee had been constructively dismissed and that the appropriate reasonable notice period was 15 months. However, a majority of the court found that the employee was not entitled to damages on account of the lost LTIP payment and should therefore not receive the $1.1 million bonus. The employee appealed the decision to the Supreme Court of Canada.
Supreme Court of Canada Identifies Two-Step Test
The court began by explaining that, at common law, an employer has the right to prompt an employee to choose to leave their job in circumstances that amount to a dismissal subject to the duty to provide reasonable notice. Where the employer does not provide reasonable notice, the employee becomes entitled to an award of damages in lieu thereof. The court further explained that when an employee sues for damages for constructive dismissal, they are claiming for damages as compensation for the income, benefits, and bonuses they would have received had the employer not breached the implied term to provide reasonable notice. Damages for wrongful dismissal are designed to compensate the employee for the breach by the employer of the implied term in the employment contract to provide reasonable notice of termination.
It then stated that a court must ask two questions when assessing whether the appropriate quantum of damages for breach of an implied term to provide reasonable notice includes bonus payments:
- Pursuant to the employee’s common law rights, would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period but for the termination? and
- If the answer to the first question is yes, did the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
On the first step, the court found that, since the Realization Event was triggered within the 15-month reasonable notice period, the employee was prima facie entitled to damages for the lost LTIP payment as part of his common law damages.
On the second step, the court found that the LTIP did not unambiguously limit or remove the employee’s common law right to the bonus payment.
The court therefore concluded that, had the employee been given proper notice, he would have been full‑time or actively employed throughout the reasonable notice period.
As a result, the court found that the employee should be awarded the amount of the LTIP as part of his common law damages for breach of the implied term to provide reasonable notice and allowed the appeal to restore the trial judge’s determination. The employee was therefore entitled to the $1.1 million bonus.
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