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22 January 2020
Employers have a duty of good faith when they terminate an employee, which requires them to be honest and forthright with employees when doing so. The law has also developed to recognise a duty to perform a contract honestly and in good faith.(1) The Supreme Court is now deciding what happens when an employer breaches that duty. Should a court award an employee money for incentive compensation that the employee would have expected to receive had it not been for the breach?
In Ocean Nutrition Canada Limited v Matthews,(2) D was employed by the company as a senior chemist and vice president. D resigned when his boss:
Approximately one year after D resigned, the company was sold.
D sued for constructive dismissal and claimed money for loss of participation in the company's long-term incentive plan. The plan read that if the company was sold, currently employed employees would get a portion of the sales proceeds. If an employee was not employed at the time of the sale, they would get no share of the proceeds. This rule applied regardless of whether the employment was ended by resignation or dismissal.
D won at trial. The trial judge found that D had been constructively dismissed and set the notice period at 15 months. The judge also said that D was entitled to his share of the sale proceeds under the plan because he would have been employed at the time of sale had he not been constructively dismissed by his manager. The company was ordered to pay D approximately $1.09 million.
The company appealed. The appeal court agreed that D had been constructively dismissed and that 15 months was the right notice period. However, two of the three judges said that D could not be awarded money under the plan. This was because the plan's language required him to be employed at the time of the sale and he had not been. The third judge disagreed. This judge thought that the company should have to pay because it had breached its duty to perform the contract honestly and in good faith. If it had not breached this duty, D would likely have been employed at the time of sale and received his share under the plan.
The decision was appealed to the Supreme Court. The key issue was D's compensation for his employer's breach of its duty of good faith and honest performance. The employee asked for damages equal to what would have occurred had it not been for the dishonesty and bad faith – namely, his share that he would have collected under the plan had it not been for his boss's conduct. Alternatively, D said that the company should be punished by being unable to rely on the plan's language to disentitle D to his share.
The company said that breaches of good faith and honesty could be compensated through awards of aggravated and punitive damages. Moving to expectation damages (ie, what the employee would have been entitled to had it not been for the breach) was inconsistent with the current state of the law.
The Supreme Court will likely release its decision sometime in 2020. Employers should keep a close eye on the outcome of this case. It could have a significant impact on how damages are awarded and calculated in the context of wrongful dismissal, especially if the Supreme Court decides that a breach of the duty of good faith and honest performance should result in the award of expectation damages.
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