THE EMPLOYERS' EDGE
ONTARIO COURT LIMITS ENTITLEMENT TO COMMISSIONS AND BONUSES PAYABLE BEYOND EXPIRY OF NOTICE PERIOD
Compensation arrangements can vary drastically from sector to sector and even within businesses. This is particularly the case in sales positions where a significant portion of an employee’s compensation is paid in bonuses or as commissions. While these arrangements make perfect business sense, they can often cause confusion when it comes to an employer’s obligations during a reasonable notice period. The recent decision of Kraft v Firepower Financial Corp. from the Superior Court of Ontario offers some lessons for employers whose employees’ compensation is heavily commission or bonus based.
Facts
The Plaintiff, a specialized salesperson in the investment banking field, was terminated from his employment without cause. He brought a summary judgment motion seeking payment for reasonable notice, commissions and bonuses, among other claims. The Plaintiff’s entitlement to commissions was based on his ability to source and present opportunities for fees payable to the company for corporate mergers and acquisitions. He also earned incentive income from participating in a bonus pool along with other members of the sales team based on his percentage of sales within the team.
The company commission policy required deals to close before a salesperson was provided with commission for a sale. This sometimes occurred months after the sale was completed. At the time of his termination, there were two outstanding sales by the Plaintiff that had yet to close, meaning he was not paid commission for the sales prior to termination. The first deal closed six months after the Plaintiff’s termination, and the second deal had still not been closed as of the date of the summary judgment motion (approximately 16 months post termination). Upon his termination the company proposed paying commissions to the Plaintiff for any outstanding sales that closed within five months of the termination date. The five month period appears to have been arbitrarily selected by the company and had no basis in existing policy or the Plaintiff’s employment agreement.
The Decision
The Court began is analysis with the general proposition that, in the absence of contractual language to the contrary, Courts view it as unfair to deny employees commissions or bonuses for sales completed prior to termination. As recently confirmed by the Supreme Court of Canada, there is no question that employees are entitled to payment for any amount they would have earned during the period of reasonable notice, subject to contractual terms limiting that right.
With respect to commissions that would be paid after the expiry of a reasonable notice period, the Court cited two cases. The first, from Alberta, suggested that commissions earned prior to the end of the reasonable notice period should be paid “regardless of when the transaction closes”. The second case, from the Ontario Court of Appeal, concerned the payment of bonuses and concluded that payment for bonuses that would be paid after expiry of the notice period should be determined with reference to the fairness of the situation. Expanding on that idea, the Court of Appeal provided: “the greater the bonus in relation to the employee’s overall compensation and the shorter the notice period, the greater the unfairness of the situation”.
Unsurprisingly, the Court then considered the appropriate notice period for the Plaintiff, who had no valid termination clause in his employment agreement. The Court considered the Plaintiff’s five and a half years of service, his specialized expertise, the mid-level stage of his career and determined that the average employee in the Plaintiff’s position should be awarded a notice period of 9 months. However, because of the obvious negative impact of the COVID-19 pandemic, the Court awarded the Plaintiff one additional month, bringing the total to 10 months.
The Court then considered the Plaintiff’s claim for each of the two commissions that were outstanding at the time of his termination. For the first sale, which closed within the reasonable notice period, the commission formed part of the Plaintiff’s “wages”, as defined in the Employment Standards Act, 2000, and was therefore owing to him. The Plaintiff’s claims for bonus pay received identical treatment, although prorated for the year in which his employment was terminated. The second sale, which still had not closed as of the date of the summary judgment motion, was not awarded. In denying the Plaintiff’s claim for that portion of his commissions, the court noted:
The Plaintiff’s notice period has come and gone, and his entitlement to wages – whether salary, bonus, commission, or other incentive payment – does not go on forever.
The notice period defines the time frame after which both the employee and the employer must put the employee’s wages flowing from his termination behind them. Otherwise, an employer and employee would be tied to each other indefinitely. I am of the view that a judgment in a case like this should bring finality to the issues between the parties.
Takeaways
While the decision is somewhat helpful for employers, in that it limits the recovery of unrealized commissions beyond the expiry of the notice period, the real lesson for employers is the importance of well drafted employment contracts. Clear and enforceable language in an employment agreement is the only way to provide certainty as to your obligations when an employee is terminated. However, for employers who do not have contractual language on point, the decision suggests that entitlement to unrealized bonuses or commissions is not unlimited once the reasonable notice period expires.
Just how long any given employee’s entitlement lasts will depend on the fairness of the situation. The Court cites only two factors to consider: (i) the significance of the bonus or commission to the employee’s overall compensation; and (ii) the length of the notice period. Presumably, other factors could also be relevant, including the terms of any relevant policies, past practice of the company in paying commissions or bonuses, failures to mitigate by plaintiffs or any other relevant factors given the situation.
If you have questions about employment contracts the lawyers at CCPartners are here to help. Click HERE to access CCPartners’ “Lawyers for Employers” podcasts on important workplace issues and developments in labour and employment law or contact any of our team members to answer you workplace questions.