COURT OF APPEAL FOR ONTARIO DATE: 20210624 DOCKET: C65121
Feldman, Brown and Miller JJ.A.
BETWEEN
James Anthony Manastersky Plaintiff (Respondent)
and
Royal Bank of Canada and RBC Dominion Securities Inc. Defendant (Appellant)
Counsel: Jeremy Devereux and Geoff Mens, for the appellant Nancy Shapiro, for the respondent
Heard: January 19, 2021 by video conference
On remand from the Judgment of the Supreme Court of Canada dated November 12, 2020.
Brown J.A.:
I. Overview
[1] This remand from the Supreme Court of Canada involves the award of certain incentive plan-related damages to the respondent, Mr. James Anthony Manastersky, in his wrongful dismissal action against his employer, the appellant RBC Dominion Securities Inc. (“RBCDS”). At trial, RBCDS conceded that it had terminated Mr. Manastersky’s employment without cause. The trial judge found that Mr. Manastersky was entitled to 18 months’ reasonable notice upon termination: 2018 ONSC 966, 46 C.C.E.L. (4th) 316.
[2] During his employment, Mr. Manastersky participated in profit-sharing plans called “carried interest plans”. From late 2004 until his termination in 2014, Mr. Manastersky participated in the Mezzanine Carried Interest Plan (the “Mezzanine CIP”). The trial judge awarded Mr. Manastersky: (i) the sum of $953,392.50 in respect of “the lost opportunity to earn entitlements under” the Mezzanine CIP during the 18-month reasonable notice period: Judgment, para. 5; and (ii) the amount of $190,789.00 in respect of Mr. Manastersky’s share of investment proceeds under the Mezzanine CIP for the period 2005 to 2013, as calculated using Mr. Manastersky’s foreign exchange methodology: Judgment, para. 6.
[3] RBCDS appealed both parts of the award.
[4] By reasons dated July 18, 2019, this court (Feldman J.A. dissenting) allowed RBCDS’ appeal regarding the award of damages in respect of the incentive plan. The court unanimously dismissed the appeal regarding the foreign exchange methodology: 2019 ONCA 609, 146 O.R. (3d) 647 (the “Original Decision”).
[5] Mr. Manastersky sought leave to appeal to the Supreme Court of Canada. By Judgment dated November 12, 2020, the Supreme Court remanded the case to this court pursuant to s. 43(1.1) of the Supreme Court Act, R.S.C. 1985, c. S-26, with the direction that “the case forming the basis of the application for leave to appeal” is remanded to this court “for disposition in accordance with Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26” (the “Remand Directions”).
[6] This court sought and received remand submissions from the parties and heard oral submissions on January 19, 2021.
II. The Approach on a Remand
[7] On the remand of a case from the Supreme Court with directions to dispose of the case in accordance with an identified decision of that court, this court will reconsider its original decision in light of the authoritative pronouncement of the Supreme Court on issues that may have affected this court’s disposition of the appeal. If the application of the identified Supreme Court decision mandates a different disposition, this court should alter its earlier decision in light of the holdings of that decision; if it does not, this court should affirm its earlier decision: Deslaurier Custom Cabinets Inc. v. 1728106 Ontario Inc., 2017 ONCA 293, 135 O.R. (3d) 241, at para. 14, leave to appeal refused, [2016] S.C.C.A. No. 249; Sankar v. Bell Mobility Inc., 2017 ONCA 295, 410 D.L.R. (4th) 1, at para. 9, leave to appeal refused, [2016] S.C.C.A. No. 251; Mikelsteins v. Morrison Hershfield Limited, 2021 ONCA 155, at para. 16.
[8] In performing the exercise required by the Remand Directions, I have considered the following: (i) the Matthews decision; (ii) the Original Decision; (iii) the trial judge’s reasons; (iv) the portions of the record relevant to the issue raised by the Remand Directions; and (v) the submissions of the parties on the appeal and in respect of the remand hearing. As these reasons address the parties’ submissions made on the remand, they supplement and therefore should be read together with the Original Decision.
III. The Law as Affirmed in the Matthews Decision
[9] Upon the termination of employment without cause, an employee is entitled to damages equivalent to what the employee would have earned during the notice period, including compensation for bonuses or incentives that would have been earned had the employer not breached the employment contract: Matthews, at para. 48. The purpose of damages in lieu of reasonable notice is to put employees in the position they would have been in had they continued to work through to the end of the notice period: Matthews, at para. 59. The remedy for a breach of the implied term to provide reasonable notice is an award of damages based on the period of notice which should have been given, with the damages representing what the employee would have earned in this period: Matthews, at para. 49.
[10] Noting that how payments under incentive bonuses or plans are to be included in these damages is a recurring issue in the law of wrongful dismissal, the Supreme Court affirmed the two-step approach set out by this court in Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619, 402 D.L.R. (4th) 325, Paquette v. TeraGo Networks Inc., 2016 ONCA 618, 352 O.A.C. 1, and Taggart v. Canada Life Assurance Co. (2006), 50 C.C.P.B. 163 (Ont. C.A.): at para. 49. The Supreme Court stated, at paras. 52-54, that the two-step approach rests on two key principles:
(i) When employees sue for damages for wrongful 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; and
(ii) A contract of employment effectively “remains alive” for the purposes of assessing the employee’s damages, in order to determine what compensation the employee would have been entitled to but for the dismissal.
[11] Building on those two principles, the Supreme Court, at para. 55, affirmed a two-step approach to determine whether an employee dismissed without cause is entitled to damages in respect of a bonus or incentive benefit:
Courts should accordingly ask two questions when determining whether the appropriate quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and certain other benefits. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period? If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
[12] The Supreme Court further clarified that resorting to the so-called “integral” test does not play a role in all cases. Where there is doubt about whether the employee would have received a discretionary bonus during the reasonable period of notice, resorting to the test of whether a benefit or bonus is “integral” to the employee’s compensation can assist in answering the question of what the employee would have been paid during the reasonable notice period: Matthews, at para. 58. By contrast, where there is no doubt that the employee would have received a bonus or incentive benefit during the notice period, there is no need to ask whether the bonus was “integral” to the employee’s compensation: Matthews, at para. 59. At the remand hearing, counsel for Mr. Manastersky acknowledged that, on the facts of this case, the issue of whether the incentive benefit was “integral” does not arise because the entitlement to payments under the Mezzanine CIP was not discretionary.
[13] The Original Decision identified the legal principles applicable to the appeal as those set out in Lin, Paquette, and Taggart, including the application of the two-step approach: Original Decision, paras. 39-43. Consequently, I do not see the exercise on this remand as applying any new legal principles identified in Matthews to the case on appeal; the legal principles affirmed in Matthews were those applied in the Original Decision. Instead, I propose to look afresh at the application of the two-step analysis to the case on appeal.
IV. The Application of Matthews’ Two-Step Analysis
A. What RBCDS paid Mr. Manastersky on termination in respect of his Mezzanine CIP entitlement
[14] Before reconsidering the application of the two-step approach to the present case, it is worth recalling what compensation RBCDS paid Mr. Manastersky in respect of his legal rights under the Mezzanine CIP following his termination.
[15] The Original Decision described, at paras. 8 to 12, the various incentive plans that had formed part of Mr. Manastersky’s employment contract. The details of the Mezzanine CIPs in place at the date of termination are set out at paras. 13 to 22 of the Original Decision. I see no need to repeat them; I incorporate them in these reasons.
[16] RBCDS terminated Mr. Manastersky’s employment on February 14, 2014. As of that date, two funds – Funds 1 and 2 – had been established under the Mezzanine CIP. Each fund contained a portfolio of investments for an Investment Period. Mr. Manastersky had been granted points, or shares, in the profits generated by the portfolios of both funds. No profits from either fund had been distributed by the time of Mr. Manastersky’s termination; his interests in both funds had been carried from 2008 until 2014. Significant payouts were made after RBCDS gave notice to Mr. Manastersky and wound-up the funds: $3,624,079 in 2015; and $1,810,230 in 2016.
[17] The trial judge found that Mr. Manastersky was entitled to 18-months’ notice, which ran from February 14, 2014 until August 14, 2015.
[18] Several months after Mr. Manastersky’s termination, RBCDS began to wind-up Funds 1 and 2. It also approved the termination of the Mezzanine CIP in respect of all future Investment Periods – that is to say, no further investment funds would be created within the Mezzanine CIP: Original Decision, at para. 28.
[19] At trial, Mr. Manastersky filed an Updated Earnings Summary. It showed that during 2015 and 2016 he was fully paid his share of the profits from the winding-up of Funds 1 and 2. Mr. Manastersky acknowledged that RBCDS had paid him all profits from Funds 1 and 2 to which he was entitled under the Mezzanine CIP.
[20] The evidence therefore shows that both during and after Mr. Manastersky’s period of reasonable notice RBCDS administered the wind-up of Funds 1 and 2 and paid out Mr. Manastersky’s share of Fund profits. Put differently, during and after his period of reasonable notice Mr. Manastersky received all the incentive plan benefits to which he was entitled in respect of the two funds that existed at the time of the termination of his employment.
B. Analysis
[21] Under the Matthews framework, the issue of any limitations on an employee’s entitlement to bonus/incentive benefit compensation typically (but not invariably) would arise under the second step – namely, do the terms of the employment contract or bonus plan unambiguously take away or limit a common law right or entitlement upon the termination of employment? The factual twist in the present case is that the issue of any limitation on Mr. Manastersky’s entitlement to further incentive benefits during his period of reasonable notice falls more under Matthews’ first step: would he have been entitled to receive payment of a CIP incentive benefit as part of his compensation during the reasonable notice period? However, as recognized in the Original Decision, at para. 51, incentive-benefit plans vary greatly in their structure and pay-out terms, so the analysis in respect of one type of incentive plan may not be transferable to the analysis of another type of incentive plan.
[22] In Matthews, the employee’s entitlement to a long-term incentive plan payment – the occurrence of a “Realization Event” such as the sale of the employer – was limited by the incentive plan’s requirement that the employee be a “full-time employee” at the date of the Realization Event. The Supreme Court held that the first step was clearly satisfied because the Realization Event fell within the employee’s reasonable notice period; but for the employee’s dismissal, he would have received the incentive payment: Matthews, at para. 59. In considering the second step, the Supreme Court held that the language of “full-time employee” did not limit the employee’s entitlement to the incentive payment when the Realization Event occurred during the period of reasonable notice: Matthews, at paras. 65-67.
[23] The circumstances of the present case differ from those in Matthews. Here, the Mezzanine CIP did not place a limit on Mr. Manastersky’s entitlement to his carried interest incentives in the event of the termination of his employment without cause. As stated in the Original Decision, at para. 17:
There is no dispute that at the time of his termination, Mr. Manastersky’s points were fully vested. When the employment of a participant was terminated without cause, the participant continued as a participant, retaining “in all Portfolios with respect to which he or she has Points, all rights represented by his or her Vested Points.”
[24] Instead, Mr. Manastersky takes issue with the treatment by the majority in the Original Decision of the scope of his entitlement in respect of the Mezzanine CIP incentive benefits during the period of reasonable notice. He contends that he was entitled to more than merely the payment of his share of the profits from Funds 1 and 2.
[25] In applying Matthews’ first step, the majority in the Original Decision concluded that Mr. Manastersky was entitled to benefits during the period of reasonable notice in respect of Funds 1 and 2 because the terms of the Mezzanine CIP linked his entitlement to incentive benefits to the existence of discrete Investment Periods, each encompassing a specific portfolio in a specific fund. Those terms of the Mezzanine CIP differed from those considered in Paquette and Lin. As stated in the Original Decision, at paras. 55-56:
The entitlement of a participant, such as Mr. Manastersky, to earn payments under the Mezzanine CIP was tied to the existence of the funds created for different Investment Periods. Two funds existed during the last decade of Mr. Manastersky’s employment and the period of reasonable notice: Funds 1 and 2. In accordance with the terms of the Mezzanine CIP, Mr. Manastersky was allocated a specific amount of points in respect of each Fund.
As Article 4.4 of the Mezzanine CIP clearly stated, the status of a participant with respect to any Investment Period “shall not give any Participant the express or implied right … to any Points for any future Investment Period.” [Emphasis added]
[26] The Original Decision went on to state, in part, at paras. 61-62:
[T]he terms of the Mezzanine CIP provided that Mr. Manastersky was not entitled to any further earnings under that plan:
i. The Management Committee was entitled to “terminate the Plan effective as of the end of any Investment Period with respect to future Investment Periods”: Art. 9.3. The Management Committee did so. No new Fund 3 Investment Period was created;
ii. A participant was granted points in respect “to each Portfolio relating to a given Investment Period” and those points represented the Participant’s share of the portion of the aggregate profits and losses of RBCDS with respect to that Portfolio: Art. 6.1.1;
iii. Any allocation of points in connection with an Investment Period after the Funds 1 and 2 Investment Periods would be done by way of a new allocation letter: Art. 6.1.3; and
iv. An employee’s status as a participant in respect to any Investment Period did not give the participant “the express or implied right … to any Points for any future Investment Period”: Art. 4.4.
Those provisions, when combined with the decision of the Management Committee to terminate the Plan, indicate that Mr. Manastersky was not entitled to any common law damages in respect of the Mezzanine CIP profit-sharing plan beyond those relating to his vested points for Funds 1 and 2…
[27] Mr. Manastersky contends that analysis was in error. He points to language used in Matthews, in respect of the second step of the analysis, that a plan’s limitation on entitlement to an incentive payment will not be effective unless it “unambiguously” limits or removes the employee’s common law right, is “absolutely clear and unambiguous” or clearly covers the “exact circumstances which have arisen”: Matthews, at paras. 55 and 64-66.
[28] Drawing on that language, Mr. Manastersky argues that the terms of the Mezzanine CIP that permitted termination of “the Plan effective as of the end of any Investment Period with respect to future Investment Periods” (Art. 9.3) and stipulating that an employee’s status as a participant in respect to any Investment Period did not give the participant “the express or implied right … to any Points for any future Investment Period” (Art. 4.4) could not operate to limit his entitlement to incentive compensation, during the period of reasonable notice, to only the payout of his profit shares in Funds 1 and 2. Mr. Manastersky contends that notwithstanding the language defining the scope of his entitlement in the Mezzanine Plan (i.e., his common law right), he is entitled to more because the provisions of the Mezzanine CIP – Arts. 4.4, 6.1.1, 6.1.3, and 9.3 – did not clearly and unambiguously cover the exact circumstances that arose in his case, namely the termination and winding-up of Funds 1 and 2 during his period of reasonable notice.
[29] Mr. Manastersky advances two bases upon which to calculate the “more” to which he contends he is entitled as further damages for incentive benefits during the notice period.
[30] First, he submits that since, for all intents and purposes, he was the only remaining employee beneficiary of the two funds, RBCDS was required to give him reasonable notice of the termination of the funds equivalent to the 18-months’ reasonable notice found by the trial judge. That would mean RBCDS would have to continue to operate the Mezzanine Funds and make new investments until the end of his period of reasonable notice (August 2015).
[31] I see two difficulties with that submission.
[32] First, in his evidence Mr. Manastersky acknowledged that the Investment Period for Fund 1 ended on December 15, 2006, following the departure of a senior plan member, and the Fund 2 Investment Period effectively came to an end in 2013, prior to Mr. Manastersky’s termination, when its investments reached $158 million. While that was just shy of the $160 million portfolio cap that would end an Investment Period, further investments in Fund 2 were not practical as the remaining $2 million was smaller than any deal the Mezzanine Fund had done.
[33] Second, there was no evidence adduced at trial that would enable the court to determine whether deferring the process of winding-up Funds 1 and 2 from the summer of 2014 until the end of the notice period in August 2015 would have resulted in a higher payout to Mr. Manastersky of his share of the profits in the funds. Further, as the CIP was a profit-sharing program, there was no guarantee that making further investments would prove profitable and increase Mr. Manastersky’s payout.
[34] The second basis for calculating the “more” is the one Mr. Manastersky primarily relied upon at the appeal. At trial, Mr. Manastersky admitted that he was not taking the position that he was entitled to an allocation of points with respect to some new or notional Fund 3 Investment Period that was never established by RBCDS under the Mezzanine CIP.
[35] By taking that position, Mr. Manastersky seemed to acknowledge that the conclusion of one Investment Period under the Mezzanine CIP did not automatically require RBCDS to start a new one, as reflected in Art. 9.3 of the Mezzanine CIP that entitled the Plan’s Management Committee to “terminate the Plan effective as of the end of any Investment Period with respect to future Investment Periods.”
[36] Notwithstanding that acknowledgement, Mr. Manastersky submits that he is entitled to more than his actual share of profits from the realization of Funds 1 and 2 that he received both during and after the period of reasonable notice. He contends that RBCDS should pay an additional amount in respect of the notice period calculated by averaging the actual share of the profits in Funds 1 and 2 that he received during and after the notice period over the lifetimes of the funds and then applying the resulting annual average (the “Notional Annualized Historical Profit Share”) pro rata to the 18-month notice period. Under that approach, Mr. Manastersky contends that during the period of reasonable notice he should have received Mezzanine CIP-related incentive benefits made up of two components: (i) first, the payouts of $5,434,309 that RBCDS made to Mr. Manastersky during and after the period of reasonable notice for his share in the profits of Funds 1 and 2, calculated in accordance with the terms of the Mezzanine CIP; plus (ii) an additional $953,392.50 in damages calculated by applying the Notional Annualized Historical Profit Share for those same funds pro rata to the 18-month period of reasonable notice. [1]
[37] I remain unpersuaded by that submission. The first step of Matthews requires ascertaining whether an employee would have been entitled to an incentive or benefit as part of their compensation during the reasonable notice period: at para. 55. Determining the content of that common law right requires examining the characteristics of the incentive or benefit to which the employee would be entitled. In many cases, the character of the incentive or benefit will be an annual payment or bonus. But that is not the character of the common law contractual benefit under the Mezzanine CIP. It was a “carried interest” plan that quite clearly did not entitle its participants to annual payments. By its terms, a participant was only entitled to receive a payment at the conclusion of an Investment Period and the realization of a specific fund’s investment portfolio. And, as noted, Mr. Manastersky carried his interest in the two funds from 2008 until 2014 without receiving any annual payment; he was paid his share of the profits from the two funds in 2015 and 2016.
[38] To accede to Mr. Manastersky’s submission would, in effect, recast his common law, fund-specific entitlement to incentive compensation under the Mezzanine CIP into a notional “annual or annualized” entitlement. The trial judge and my colleague in dissent in the Original Decision acceded to Mr. Manastersky’s submission. With respect, I cannot.
[39] Mr. Manastersky’s position seeks to alter, in a fundamental way, the character of the common law right to incentive compensation to which he was entitled under his employment contract. The terms of an incentive plan’s eligibility criteria and formula for calculating a bonus remain relevant to the inquiry into what benefit the employee would have been entitled to as part of his or her compensation during the reasonable period of notice: Paquette, at para. 18. I do not read the Matthews decision as changing that principle.
[40] Matthews provides that damages for dismissal are designed to compensate the employee “for the income, benefits, and bonuses they would have received had the employer not breached the implied term to provide reasonable notice:” at para. 53. The terms of Mr. Manastersky’s employment contract did not entitle him to receive an annual incentive payment. The terms entitled him to receive a fund-specific incentive payment upon the end of a fund’s investment period. During his period of reasonable notice, Mr. Manastersky was entitled to receive damages calculated on the latter basis, not damages calculated on both bases. In my view, RBCDS paid Mr. Manastersky that to which he was entitled at common law and, with respect, the trial judge erred in concluding otherwise.
V. Disposition
[41] For these reasons, having considered the Original Decision in light of Matthews, I would affirm the Original Decision.
[42] I would order Mr. Manastersky to pay RBCDS its costs of the remand fixed in the amount of $5,000.00, inclusive of disbursements and applicable taxes.
“David Brown J.A.”
“I agree. B.W. Miller J.A.”
Feldman J.A. (dissenting):
A. Introduction
[43] Mr. Manastersky sought leave to appeal this court’s majority decision to the Supreme Court of Canada. The issue to be decided was essentially whether the majority’s decision overturning the trial judge, or the dissenting reasons that would have upheld the trial judge, had correctly applied the test for damages for wrongful dismissal, as set out in this court’s decisions in Lin v. Ontario Teachers’ Pension Plan, 2016 ONCA 619, 402 D.L.R. (4th) 325, Paquette v. TeraGo Networks Inc., 2016 ONCA 618, 352 O.A.C. 1, and Taggart v. Canada Life Assurance Co. (2006), 50 C.C.P.B. 163 (Ont. C.A.).
[44] Before considering whether to grant the appellant leave to appeal, the Supreme Court heard an appeal from the Nova Scotia Court of Appeal in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, 449 D.L.R. (4th) 583, and reserved its decision. Ultimately, in Matthews, the Supreme Court did not change the law of Ontario and endorsed this court’s approach in Lin, Paquette, and Taggart.
[45] Without granting leave to appeal, the Supreme Court remanded the appellant’s case to this court pursuant to s. 43(1.1) of the Supreme Court Act, R.S.C. 1985, c. S-26, “for disposition in accordance with Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26.”
[46] Because the Supreme Court in Matthews adopted and endorsed this court’s jurisprudence that had been applied by the trial judge, and by the majority and the dissent on the appeal, both the parties and this court have had to grapple with the question of what issue was remanded to this court for rehearing. To me, the correct approach is to ask the question: If the trial judge had had the benefit of the Matthews decision, would he have approached the case differently? Similarly, on appeal, the question for this court would be: Did the trial judge err by failing to apply the principles and the test as now set out by the Supreme Court in Matthews? [2]
B. The Matthews Decision
[47] David Matthews was an experienced chemist who, from 1997, occupied a number of senior management positions with Ocean Nutrition Canada Ltd. (“Ocean”). In 2007, efforts to force Mr. Matthews out of the company started, and he ultimately resigned in 2011, resulting in constructive dismissal.
[48] As a senior executive, Mr. Matthews was part of the long-term incentive plan (“LTIP”), which included as a benefit a significant payment in the event of the sale of the company. About 13 months after Mr. Matthews was forced out, the company was sold for $540,000,000, but it refused to pay him his entitlement under the LTIP on the basis that he did not comply with a provision that required him to be a “full-time employee” on the date of the sale.
[49] In endorsing this court’s decisions in Lin, Paquette, and Taggart, the Supreme Court in Matthews made the following important observations, at paras. 47-55, about the purpose of the two-step test for determining a wrongfully dismissed employee’s entitlement to damages, and how to apply it:
[47] In the case at bar, the only disagreement in respect of reasonable notice turns on whether Mr. Matthews’ damages include an amount to compensate him for his lost LTIP payment.
[48] In my respectful view, the majority of the Court of Appeal erred by focusing on whether the terms of the LTIP were “plain and unambiguous” instead of asking what damages were appropriately due for Ocean’s failure to provide Mr. Matthews with reasonable notice. The issue is not whether Mr. Matthews is entitled to the LTIP in itself, but rather what damages he is entitled to and whether he was entitled to compensation for bonuses he would have earned had Ocean not breached the employment contract. By focusing narrowly on the former question, the Court of Appeal applied an incorrect principle, resulting in what I see as an overriding error.
[49] Insofar as Mr. Matthews was constructively dismissed without notice, he was entitled to damages representing the salary, including bonuses, he would have earned during the 15-month period (Wallace, at paras. 65-67). This is so because the remedy for a breach of the implied term to provide reasonable notice is an award of damages based on the period of notice which should have been given, with the damages representing “what the employee would have earned in this period” (para. 115). Whether payments under incentive bonuses, such as the LTIP in this case, are to be included in these damages is a common and recurring issue in the law of wrongful dismissal. To answer this question, the trial judge relied on Paquette and Lin from the Court of Appeal for Ontario. I believe he took the right approach.
[50] In Paquette, the employee participated in his employer’s bonus plan, which stipulated that employees had to be “actively employed” on the date of the bonus payout. That language is broadly comparable to that found in the LTIP which, at clause 2.03, requires the claimant to be a “full-time employee” of the company. In Paquette, but for the employee’s termination, the employee would have received the bonus within the reasonable notice period. The motion judge in that case, however, concluded that the employee was not entitled to the bonus because, while he may have been “notionally” employed during the reasonable notice period, he was not “actively” employed and so did not qualify under the terms of the plan.
[51] The employee’s appeal was allowed. The Ontario Court of Appeal relied principally on its prior decision in Taggart v. Canada Life Assurance Co. (2006), 50 C.C.P.B. 163, concerning a similar question related to pension benefits. In that case, Sharpe J.A. rightly cautioned that courts should not ignore the legal nature of employees’ claims. “The claim is not”, he said, “for the pension benefits themselves. Rather, it is for common law contract damages as compensation for the pension benefits [the employee] would have earned had [the employer] not breached the contract of employment” (para. 16). Consequently, “a terminated employee is entitled to claim damages for the loss of pension benefits that would have accrued had the employee worked until the end of the notice period” (para. 13). With respect to the role of a bonus plan’s contractual terms, Sharpe J.A. explained that “[t]he question at this stage is whether there is something in the language of the pension contract between the parties that takes away or limits that common law right” (para. 20).
[52] The Court of Appeal in Paquette built upon the approach in Taggart, proposing that courts should take a two-step approach to these questions. First, courts should “consider the [employee’s] common law rights” (para. 30). That is, courts should examine whether, but for the termination, the employee would have been entitled to the bonus during the reasonable notice period. Second, courts should “determine whether there is something in the bonus plan that would specifically remove the [employee’s] common law entitlement” (para. 31). “The question”, van Rensburg J.A. explained, “is not whether the contract or plan is ambiguous, but whether the wording of the plan unambiguously alters or removes the [employee’s] common law rights” (para. 31).
[53] I agree with van Rensburg J.A. that this is the appropriate approach. It accords with basic principles of damages for constructive dismissal, anchoring the analysis around reasonable notice. As the court recognized in Taggart, and reiterated in Paquette, when employees sue 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 (see also Iacobucci v. WIC Radio Ltd., 1999 BCCA 753, 72 B.C.L.R. (3d) 234, at paras. 19 and 24; Gillies v. Goldman Sachs Canada Inc., 2001 BCCA 683, 95 B.C.L.R. (3d) 260, at paras. 10-12 and 25; Keays, at paras. 54-55). Proceeding directly to an examination of contractual terms divorces the question of damages from the underlying breach, which is an error in principle.
[54] Moreover, the approach in Paquette respects the well-established understanding that the contract effectively “remains alive” for the purposes of assessing the employee’s damages, in order to determine what compensation the employee would have been entitled to but for the dismissal (see, e.g., Nygard Int. Ltd. v. Robinson (1990), 46 B.C.L.R. (2d) 103 (C.A.), at pp. 106-7, per Southin J.A., concurring; Gillies, at para. 17).
[55] Courts should accordingly ask two questions when determining whether the appropriate quantum of damages for breach of the implied term to provide reasonable notice includes bonus payments and certain other benefits. Would the employee have been entitled to the bonus or benefit as part of their compensation during the reasonable notice period? If so, do the terms of the employment contract or bonus plan unambiguously take away or limit that common law right?
[50] In my view, the key point made by the Supreme Court about the first stage of the two-step test is that the purpose is to recognize that the contract of employment is treated as alive and continuing to subsist during the notice period, so that the question is, what would the employee have earned or been entitled to receive had their employment not been wrongfully terminated?
[51] Mr. Matthews argued that since the sale of the company took place during the 15-month reasonable notice period, he was prima facie entitled to common law damages for the lost LTIP payment. Ocean’s position was that Mr. Matthews could not satisfy the first stage of the two-part test. Mr. Matthews had a common law entitlement to damages only “for all compensation and benefits that are integral to his compensation,” and the LTIP was not integral because he did not have a vested right at the date of termination.
[52] The Supreme Court rejected Ocean’s position. It agreed that “whether a bonus or benefit is ‘integral’ to the employee’s compensation assists in answering the question of what the employee would have been paid during the reasonable notice period”: at para. 58. However, in Mr. Matthews’ case, there was no need to ask whether the benefit was an integral part of his compensation because there was no question that, had he remained employed during the notice period, he would have received the LTIP benefit. It was not a discretionary payment, and he would have been entitled to it. Therefore, he was prima facie entitled to receive damages as compensation for the LTIP. The only issue for the Supreme Court to resolve was whether the terms of the LTIP unambiguously limited or removed Mr. Matthews’ common law right to receive damages.
[53] Turning to that issue, the Supreme Court examined the terms of the LTIP to see if there were any that removed Mr. Matthews’ common law entitlement. It concluded that the limiting terms did not have that effect. The two relevant clauses provided:
2.03 CONDITIONS PRECEDENT:
[Ocean] 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 [Ocean]. For greater certainty, this Agreement shall be of no force and effect if the employee ceases to be an employee of [Ocean], regardless of whether the Employee resigns or is terminated, with or without cause.
2.05 GENERAL: The Long Term Value Creation Bonus Plan does not have any current or future value other than on the date of a 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.
[54] The Supreme Court emphasized, at paras. 64-65, that the wording of the LTIP must “unambiguously limit[] or remove[] the employee’s common law right”, and that the provisions “must be absolutely clear”. To that end, language requiring an employee to be “full-time,” like in clause 2.03, would not suffice to remove an employee’s common law right to damages. Had Mr. Matthews been given proper notice, he would have been a full-time employee during the notice period.
[55] The Supreme Court also noted, at para. 66, that “where a clause purports to remove an employee’s common law right to damages upon termination ‘with or without cause’, such as clause 2.03, this language will not suffice,” pointing out that termination without cause does not mean termination without notice. And in any event, because an employment contract is not treated as terminated until after the reasonable notice period expires for the purpose of calculating damages for wrongful dismissal, even if the clauses had expressly referred to wrongful termination, that would not have been sufficient to unambiguously alter the employee’s common law entitlement.
[56] In the result, the Supreme Court concluded that under step one, Mr. Matthews was prima facie entitled to the LTIP payment as part of his compensation, and under step two, the terms of the LTIP did not unambiguously remove that entitlement.
C. Analysis
[57] Based on the Supreme Court’s approach and analysis in Matthews, which follows Lin, Paquette, and Taggart, in my view, had the trial judge had the benefit of the Matthews decision and had he applied that decision as the legal framework for analyzing the appellant’s claim, his analysis and conclusion would not have changed. And it of course follows that there would be no basis to interfere with the trial judge’s decision on appeal. I base this conclusion on paras. 38-48 of the trial judge’s reasons:
[38] Benefit Plans generally include limitations or conditions on payments out of the plan. Where an employee has been dismissed without cause, it may be argued that the terms of such Benefit Plans limit or eliminate the employee’s entitlements upon the termination of his or her employment. In Taggart v. Canada Life Assurance Co., Sharpe J.A. explained the correct approach for analysing such issues. The first step in the analysis is to determine the employee’s common law right to damages for breach of contract. The second step is to determine whether the terms of the relevant Benefit Plan alter or remove a common-law right. Moreover, clear language is required to limit common law entitlements.
[39] Applying this analysis to the CIP, in my view it is clear that the CIP represented an integral part of Manastersky’s compensation. His participation in the CIP was included in his Contract of Employment and he continued to participate in the Plan throughout his 13 years of employment at RBC. Although the allocation of a specific number of Points to participants was discretionary, once awarded, Points could not be reduced without the agreement of the participant. Manastersky’s Points allocation had remained constant since 2007, when he was awarded 50% of the total available Points under the Plan. Because the entitlements under the Plan depended on investment earnings from the Mezzanine Fund, the amounts earned by participants would fluctuate from year to year. However the calculation of a participant’s share of investment proceeds was nondiscretionary in the sense that it would be determined through the application of the Payment Formula set out in the Plan itself. Over the course of Manastersky’s 13 years at RBC, his average share of investment proceeds per investment year was approximately $635,000, representing well over 50% of his total annual income.
[40] I note that in Bain v. UBS Securities Canada Inc., D.A. Wilson J. set out a general test for determining whether a bonus is integral to the employee’s compensation. One element of the test was whether the bonus was received each year, although in different amounts. It might be noted that in this case no payments had been made from the CIP since 2007, since the Fund 2 investment period that had commenced in 2006 had not yet concluded. Nevertheless, participants in the CIP continued to accumulate entitlements each year. The fact that no actual payments had been made out of the Plan since 2007 does not alter or diminish the significance and materiality of the Plan to a participant’s annual compensation.
[41] In short, the CIP was a significant, nondiscretionary variable form of compensation that represented more than half of Manastersky’s annual income, similar to the variable forms of incentive compensation considered by Corbett J. in Lin v. Ontario Teachers' Pension Plan Board. It was integral to his compensation and therefore forms part of his presumptive entitlement to damages at common law during the notice period.
[42] The second stage of the analysis is to consider whether there are any provisions in the CIP which limit or eliminate this presumptive entitlement upon termination of employment. The CIP did make provision for the impact of a termination of employment on an employee’s entitlements under the Plan. However, far from eliminating or limiting Manastersky’s entitlements upon termination, the CIP provided that all of Manastersky’s outstanding Points would immediately vest in the event that he was terminated without cause. It was for this reason that the Termination Offer provided that, despite the termination of his employment, Manastersky’s rights under the CIP remained fully vested. In short, the CIP did not purport to limit or reduce Manastersky’s entitlements under the Plan in the event that his employment was terminated without cause.
[43] RBC argued that Manastersky was not entitled to compensation in respect of the CIP during the common law notice period by virtue of a provision which allowed RBC to “terminate the Plan effective as of the end of any Investment Period with respect to future Investment Periods.” As noted earlier, by the fall 2013, the CIP was nearing the end of the investment period for Fund 2, by virtue of the fact that the total amount invested through the Mezzanine Fund was approaching $160 million. Upon the conclusion of the Fund 2 investment period, a new investment period would automatically begin. However, RBC could also elect to terminate the CIP with respect to future investment periods upon the conclusion of the Fund 2 investment period and prior to the commencement of Fund 3. In fact, RBC exercised this right on June 25, 2014, when it terminated the CIP in respect of future investment periods.
[44] I do not believe that the fact that RBC had the option of terminating the Plan at the end of an investment period should be regarded as limiting Manastersky’s entitlement to notice at common law. First, RBC’s right to terminate the CIP was in no way tied to the termination of Manastersky’s employment. Far from containing “clear language” limiting rights upon termination of employment, the provision in the CIP permitting RBC to terminate the Plan did not purport to limit or reduce his common law entitlements. Nor could it be said that the parties did not turn their minds to the consequences flowing from the termination of Manastersky’s employment on his entitlements under the CIP. In fact, the CIP enhanced Manastersky’s entitlements in the event his employment was terminated without cause, through accelerated vesting of his Points.
[45] Further, the fact that RBC terminated the CIP in respect of future investment periods on June 25, 2014, four months after Manastersky’s dismissal without cause, does not alter this analysis. As Sharpe JA explained in Taggart, in cases where a terminated employee seeks compensation for entitlements under a benefit plan, the claim is not for the benefits themselves. Rather, the claim is for common law contract damages as compensation for the benefits that the employee would have earned had the employer not breached the contract of employment. The employee is claiming for the lost opportunity to continue to earn or receive benefits that would have been available in the event their employment had continued. As of the date of the Termination Offer, RBC had not in fact terminated the CIP, and it therefore remained in place as an integral component of Manastersky’s compensation.
[46] What if Manastersky’s employment had continued past February 14, 2014 and in June 2014 RBC had terminated the CIP without offering Manastersky some alternate, comparable form of compensation? Although consistent with the terms of the CIP, this would have amounted to a unilateral significant reduction in his compensation, as it would have eliminated the opportunity for him to continue to accrue entitlements through the CIP. This would in all likelihood have amounted to a constructive dismissal, thereby triggering an entitlement to damages at common-law, including damages for the lost opportunity to continue to earn entitlements under the CIP.
[47] In any event, RBC had not in fact terminated the CIP as of the date of Manastersky’s termination of employment. Nothing in the CIP purported to limit or restrict his entitlements under the Plan upon the termination of his employment. His termination without cause deprived him of the opportunity to continue to earn entitlements under the CIP and he is entitled to be compensated in damages for that lost opportunity.
[48] RBC also argues that rather than terminate the CIP, it could simply have elected to cease making any additional investments in the Mezzanine Fund, effectively eliminating Manastersky’s opportunity to earn additional entitlements under the CIP. But if RBC could not directly reduce Manastersky’s compensation unilaterally, it could not achieve the same result through indirect means. To be sure, RBC was perfectly entitled to make investment decisions as to how and where it wished to invest its capital but, in doing so, it could not escape its contractual and common law obligations to Manastersky. [Footnotes omitted.]
[58] The trial judge applied all of the principles from Matthews. He applied the two-step test by first determining the appellant’s common law right to damages for breach of contract, and second determining whether the CIP altered or removed the appellant’s common law right. And he took note that clear language is required to limit common law entitlements.
[59] At the first step, to determine the appellant’s common law right to damages, he addressed the question whether the CIP represented an integral part of the appellant’s compensation, focusing on the evidence of the significance and materiality of the CIP to the appellant’s annual compensation, regardless of whether it was paid or just accrued annually.
[60] At the second step, the trial judge found that the terms of the CIP provided for full vesting on termination without cause, and did not purport to reduce the appellant’s entitlement upon the termination of his employment. He considered the effect of the provisions that allowed the respondent to terminate the CIP for future investments, which it ultimately did during the notice period. However, interpreting those provisions, as he was entitled to do (Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633), the trial judge found that the respondent’s option to terminate the CIP did not limit the appellant’s entitlement to notice at common law. He also specifically rejected the respondent’s argument that because it could terminate the CIP by simply ceasing to make additional investments into the Fund, it was entitled to thereby reduce the appellant’s compensation by eliminating his opportunity to earn his entitlements under the CIP. The trial judge concluded that the respondent’s freedom to make investment decisions did not allow it to “escape its contractual and common law obligations”.
[61] In his analysis of the terms of the CIP, the trial judge addressed their effect on termination under step two, as well as their effect on the appellant’s common law entitlement under step one. In fact, as my colleague observes, at para. 21, the twist in this case is that the court was required to determine whether the terms of the CIP limited the appellant’s common law entitlement. The trial judge addressed this issue directly by interpreting the terms of the CIP in the context of the factual record.
[62] The determination at step one as to whether the CIP constituted an integral part of the appellant’s compensation package was the key issue before the court at trial and on appeal. [3] While it is acknowledged that the CIP was not discretionary, the question whether it formed an integral component of the appellant’s compensation arose because the respondent took the position that it was entitled to discontinue the CIP (which it did during the notice period) without replacing it with a comparable benefit. My colleague accepts the respondent’s position that Mr. Manastersky’s entitlement was fund-specific, and that the appellant did not have any further right to claim common law damages once the Fund was wound up and he received the value of his vested interest in the CIP. However, whether the appellant’s entitlement was “fund-specific” was the question before the court. Under step one, the issue was whether the appellant was entitled to receive an equivalent benefit once the fund was wound up, because the CIP benefit formed an integral part of his compensation.
[63] My colleague says that the appellant was only entitled to the CIP and that he got what he was entitled to. He relies on the fact that the respondent was not obliged to start a third Fund.
[64] The appellant does not dispute the respondent’s entitlement to make business decisions, including whether to continue with the Mezzanine Fund or the CIP. However, that does not determine his entitlement to be compensated at the level reflected by his participation in the Fund through the CIP. That turns on whether the CIP formed an integral part of his compensation package. The trial judge found at step one that it did, in the paragraphs quoted above. I agree with his analysis.
[65] Furthermore, the terms of the CIP do not undermine the conclusion that it formed an integral part of the appellant’s compensation. There are no terms in the CIP or in the appellant’s employment agreement that unambiguously state that if the respondent decided to terminate the CIP, the effect would be to discontinue the employee’s right to receive compensation at a level based on the performance of the Fund. The trial judge found that there was no unambiguous language that would affect the appellant’s common law entitlement. I agree with that finding as well.
[66] While the Supreme Court in Matthews endorsed the requirement for unambiguous language in order to disentitle an employee at stage two, it follows that the same requirement applies at stage one. In endorsing the requirement, the Supreme Court referred to the principle of contractual interpretation for unilateral contracts that clauses excluding or limiting liability be strictly construed. It stated, at paras. 64-65, that the principle “applies with particular force”, and added that “the provisions of the agreement must be absolutely clear and unambiguous.” There is no basis to suggest that the court intended to limit this requirement to the stage two portion of the analysis.
[67] The appellant was hired to be a director of the Mezzanine Fund and to be compensated in significant part based on the performance of the Fund through the CIP. Eventually the respondent decided to bring the Fund in-house and to eliminate the CIP incentive performance plan. The respondent was certainly entitled to do that as a business decision. However, the result was to effectively eliminate the appellant’s position with the respondent as the director of the Fund. When the respondent decided to make that decision, it was obliged to give the appellant reasonable notice, and to pay him what he would have earned during that period or to offer him a comparable position at a comparable rate of compensation. Failure to do so would constitute constructive dismissal: Farber v. Royal Trust, [1997] 1 SCR 846, at paras. 33-36. When it became clear that there would be no comparable position, the respondent terminated the appellant’s employment, whereupon he was entitled to be paid what he would have earned had he remained employed during the reasonable notice period.
[68] Although the respondent’s Mezzanine CIP was a complex, high-end financial vehicle, as was the appellant’s very remunerative entitlement to his points allocation in it, the law with respect to the two-step process for determining entitlement to damages in lieu of notice for wrongful termination of employment, set out by the Supreme Court in Matthews, applies to it in the same way as it does to a more simple bonus or benefit. The court asks first, what is the employee’s common law entitlement during the notice period, and second, whether the terms of the employment contract or bonus plan “unambiguously take away or limit that common law right” on termination.
[69] In this case, there is no language that purports to reduce the appellant’s compensation if the CIP is discontinued (step one), or to limit the appellant’s entitlement because of his dismissal (step two). The language that my colleague focuses on is the right of the respondent to discontinue the plan. That right is merely the right of any business to make business decisions in its own interest. It is not an unambiguous right to also reduce the appellant’s compensation, either while he remains employed or is in the reasonable notice period following the termination of his employment.
[70] What the Supreme Court’s decision in Matthews emphasized, at para. 65, is how “absolutely clear and unambiguous” the provisions of the employment agreement must be “to remove an employee’s common law right to damages.” There is no language in the appellant’s employment agreement stating that if the CIP is terminated, so also is his entitlement to be compensated at the same level.
[71] In my view, the trial judge was correct in his analysis of the CIP, and in his application of the law as it was then and as confirmed in Matthews. The trial judge’s decision remains entitled to the deference of this court.
[72] I would affirm my original decision to dismiss the appeal from the trial judge’s decision, with costs.
Released: June 24, 2021 “K. F.” “K. Feldman J.A.”
[1] The trial judge, at paras. 50-51, averaged Mr. Manastersky’s CIP entitlement over the period 2005 to 2013 (9 years), calculated a notional annual entitlement from Funds 1 and 2, and the multiplied it by the 1.5 years reasonable notice period.
[2] In British Columbia (Ministry of Forests) v. Teal Cedar Products Ltd., 2015 BCCA 263, 70 B.C.L.R. (5th) 318, at para. 2, the Court of Appeal for British Columbia, considering a remand after the Supreme Court’s decision in Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, stated that the remand hearing was to be treated as a fresh appeal: “Although this Court can inform itself from its earlier reasons, the appeals are to be reconsidered having particular regard for the law as stated in Sattva.” The remand decision was appealed to the Supreme Court, where the result was overturned: see Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32, [2017] 1 S.C.R. 688. But the Supreme Court stated, at para 78: “However, on remand, the Court of Appeal had the benefit of Sattva, and its decision was specifically directed toward reconsidering the majority’s decision in light of Sattva.”
[3] My colleague comments, at para. 12, of his reasons that counsel for the appellant in oral submissions agreed that because the CIP was not discretionary, the issue of whether the CIP was integral did not arise. As I understand her comment in the context of her full submissions, she agreed that because the CIP was not discretionary, it was unnecessary to consider whether it was integral on that basis. However, the issue in the case remains whether the employer could cancel the CIP without replacing it or giving reasonable notice, and that turns on whether it was integral to the appellant’s compensation package.