Ontario, Canada: Court Considers Employee’s Entitlement to Commissions “Booked and Billed” after Termination but During Reasonable Notice Period

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A recent Ontario Superior Court decision, Kerner v. Information Builders (Canada) Inc., 2020 ONSC 2975, clarified whether an employee was entitled to commissions that were “booked and billed” after his job termination, but during his reasonable notice period. 

Background

The employee was subject to an employment agreement and a sales commission agreement.  The requirements for entitlement to the relevant commission fees were set out in both a 2017 Sales Plan and 2018 Sales Plan.

The relevant portion of the 2017 Sales Plan, set out below, provided that to be entitled to commission, the employee had to be employed at the time when the sale was booked and billed:

2017 Sales Plan

Please note that the governing principles set forth below are applicable in all cases. In order to be entitled to receive a commission you must met [sic] all of the requirements of paragraphs 1 through 3 below, as well as all applicable provisions of the attached documents. Unless you do so, no commission is earned, due, owing, or payable to you:

1.  You must have been a procuring cause of the sale and complied with all other applicable requirements. In some cases commissions may be payable in installments.

2.  No commissions are payable until the sale has been booked and billed.

3.  In order to be entitled to receive a commission you must be employed by IB at the time the sale has been booked and billed.

The relevant portion of the 2018 Sales Plan, set out below, provided that commissions were not payable during any notice period, including the statutory notice period, following termination of employment for any reason, unless the sale was booked and billed prior to the date of termination.

2018 Sales Plan

Commissions are not payable in respect of any period of notice, whether contractual, statutory or based upon the common law, following termination of your employment for any reason whatsoever, unless the sale transaction was booked and billed prior to the date of termination of your employment. The date of termination is the date on which your active employment with Information Builders ceases and you are no longer providing services to the company. [emphasis added]

Decision

The court determined that the employee’s appropriate period of reasonable notice at common law was eight months.  In considering his entitlement to commissions that were “booked and billed” during the reasonable notice period, the court found that the analysis of the Ontario Court of Appeal in O’Reilly v. IMAX Corporation, 2019 ONCA 991, which we wrote about in detail here, was highly relevant.  The court relied on the following summary of the applicable law set out in that case:  

  1. A wrongfully dismissed employee is entitled to damages for the loss of wages, salary and other benefits, that would have been earned during the reasonable notice period.
  2. The principle applies to bonuses, stock options, or incentives that are an integral part of the employee’s compensation, as well as pension benefits that would have been accrued or been earned during the reasonable notice period.
  3. In considering whether the loss of such benefits is recoverable, the court undertakes a two-step analysis.
  4. The first step requires a determination of the employee’s common law right to damages for breach of contract, bearing in mind that the measure of damages is the amount to which the employee would have been entitled had the employer performed the contract.
  5. The second step requires the court to determine whether the terms of the relevant contract or plan unambiguously alter or remove the employee’s common law rights, having regard to the presumption that the parties intended to apply the law, in absence of clear language to the contrary. (para. 32, O’Reilly v. IMAX)

Upon proceeding with its analysis of the case at hand, the court noted that the parties agreed that the commission was an integral part of the employee’s compensation package.  It then considered whether the wording of the provisions in the 2017 Sales Plan and 2018 Sales Plan effectively limited the employee’s right to receive compensation for lost opportunity to earn commissions during the period of reasonable notice. In considering this question, the court pointed to the following paragraph in O’Reilly and followed its guidance:

While the language in all the plans at issue in this case extinguish the respondent’s right to exercise any unvested awards as of the date of “termination” or when employment “terminates”, they do not establish, in unambiguous terms, when the date of termination is or when employment terminates. In other words, they leave open the possibility that termination could have occurred at the end of the reasonable notice period. And, as expressed above, where such ambiguity exists, the language will be interpreted as mandating a lawful termination. (para. 52, O’Reilly v. IMAX)

The 2017 Sales Plan

The court concluded that the 2017 Sales Plan language did not exclude the employee’s right to be paid commission during the notice period. It arrived at this conclusion based on the following factors:

  1. The plan referred to a lawful termination, which would have effect at the end of the reasonable notice period. Nothing in the plan’s language precluded such an interpretation. (para. 39)
  1. In accordance with the principles set out in O’Reilly v. IMAX, the plan’s statement “you must have been a procuring cause of the sale and complied with all other applicable requirements” referred to a situation where there has been lawful dismissal where the employee was given reasonable notice of dismissal.  There was no “clear language to the contrary” demonstrating that the parties had agreed that limitations on payment set out in the plan would apply to an unlawful dismissal.

The court concluded that since the employer breached the employees’ employment contract by failing to give him reasonable notice of dismissal, the employee was entitled to wrongful dismissal damages at common law, consisting of the compensation he would have earned had the employer provided him with working notice of dismissal. These damages would have included the employee’s commissions pursuant to the 2017 Sales Plan, and a reasonable estimate of the employee’s damages for commissions was the average commission earned by the employee during his employment, including the reasonable notice period.

The 2018 Sales Plan

The court concluded that:

  • There was a material change in the wording of the 2018 Sales Plan, compared to the 2017 Sales Plan;
  • The employee was not aware of the change to his employment contract and he did not accept it.  The employer did not refer to the change in a document titled “Material Changes”, or discuss it at a sales meeting where the new plan was explained;
  • The jurisprudence provides that a significant change to the terms and conditions of employment requires consideration and there was no consideration in this case; and
  • The termination clause was void because it had the potential of contracting out of the employer’s statutory obligation to provide the employee with his full wages during the statutory notice period, which, pursuant to s. 1(1) of the Employment Standards Act, 2000 (ESA), includes commissions that become payable during the notice period, contrary to s. 5(1) of the ESA.  Although s. 5(2) of the ESA permits an employer to contract out of the ESA as long as a greater benefit is given to the employee, the 2018 Sales Plan did not substitute a greater benefit by providing reasonable notice; it provided only for the ESA’s minimums. The employee’s minimum statutory entitlement includes notice of termination, severance pay, and any commissions payable during the notice period, and none of these payments are subject to the duty to mitigate.

For the reasons outlined above, the court awarded the employee damages in lieu of reasonable notice for the loss of the opportunity to earn commissions during the 8-month reasonable notice period.

Bottom Line for Employers

Kerner v. information Builders (Canada) Inc. confirms that employers that intend to exclude an employee’s entitlement to incentives that are an integral part of the employee’s compensation after the employee’s termination but during their reasonable notice period, must pay close attention to their incentive grant documents and other employment agreements, and:

  • Establish in unambiguous terms when the date of termination is or when employment terminates, and avoid leaving open the possibility that termination could occur at the end of the reasonable notice period.
  • Ensure that they unambiguously remove the employee’s common law right to receive damages for the lost opportunity to earn the incentive during the employee’s reasonable notice period.
  • If a material change is made in the wording of the incentive grant document or other employment agreement that has the effect of excluding the employee’s entitlement to an incentive, ensure that: (a) the change is effectively communicated to the employee when it is made so that the employee will be viewed as having accepted it; and (b) there is consideration for the change.
  • Ensure that they do not contract out of the employer’s statutory obligation to provide the employee with their full wages during the statutory notice period, which includes commissions that become payable during the notice period, contrary to s. 5(1) of the ESA.

Employers are encouraged to request that experienced employment law advisors regularly review and update their incentive grant documents and employment contracts to help avoid being required to pay damages equal to the value of an employee’s lost incentives that would have vested during a reasonable notice period. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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