When employed in a position that pays commission, a person would rightfully expect to earn any commission stemming from sales they successful made while employed. However, the line becomes more blurry when the sales are not finalized until after the employee has been terminated. Blurrier still when the sales were made by a team the employee supervised rather than the employee themselves. Recently, an Ontario court considered two employment contract terms regarding commission and found them to be lacking. Both terms dealt with commissions earned after termination but within the statutory notice period.

The first clause came from a 2017 commission plan which stated that the employee must be employed at the time the sale was “booked and billed” in order to collect a commission. The second term was in a 2018 commission policy which stated that no commissions were payable after active employment had ceased for any reason, and specifically excluded the statutory notice period.

The issue in question centred upon the plaintiff’s claim for commissions which were “booked and billed” after his termination. These commissions were not based on sales efforts by the plaintiff himself, but rather on the sales of his team which he supervised. The sums were considerable. His base salary was $200,000 and commissions were roughly $90,000 in the full year prior to termination. The commission claim in the case at hand was set at $140,000.

2017 Plan

The court determined that the reference in the plan to “termination” must mean a legal termination. For this reason, the court allowed the commissions which would normally have fallen due as the sales had been “booked and billed” during the notice period. This is the traditional view taken to such termination clauses unless there are particular words to the contrary. Even where this is so, the clause must still honour the notice period entitlements under the Employment Standards Act.

2018 Plan

This clause was also found to be unenforceable. The logic for this conclusion was that the employee had not been aware of the new term and more importantly, there was no value or “consideration” given to make a new bargain on these terms, one of which was a significant change to the employee’s bonus plan.

This is a well worn concept in Ontario law. The Court relied upon a 2004 Court of Appeal decision to this effect:

Our jurisprudence has held that a significant change to the terms and conditions of employment requires consideration. In this case, I find that there was no consideration. The Court of Appeal, in Hobbs v. TDI Canada Ltd. …, described the law as follows: “The requirement of consideration to support an amended agreement is especially important in the employment context where, generally, there is inequality of bargaining power between employees and employers. Some employees may enjoy a measure of bargaining power when negotiating the terms of prospective employment, but once they have been hired and are dependent on the remuneration of the new job, they become more vulnerable.”

The Court also found that the employer was not allowed to contract out of an employment standard, such as in this case, the statutory notice period. Commissions are deemed to be wages under the Employment Standards Act and hence a contract term denying this entitlement was a violation of the employee’s protected right. The important test was whether the term “potentially” violated the statute, again, a significant point to note:

In Covenho v. Pendylum Inc., the Court of Appeal held, at para. 7: In determining whether the contract is in compliance with the ESA, the terms must be construed as if the appellant had continued to be employed beyond three months; if a provision’s application potentially violates the ESA at any date after hiring, it is void. [emphasis added]

Get Advice and Know Your Rights

Employment contracts are a difficult concept to master, as has been clearly shown by the flurry of cases recently decided. The best advice for all employers is to get solid legal review of all contracts, not just newly contemplated terms. Employees should always take advice before signing as well, and certainly when the rubber hits the road on termination. Stay up to date on your rights and obligations, whether you are an employer or employee. The law is an evolving instrument and it is important to stay up to date and aware of your obligations and rights.

We remain by your side to provide real-time practical insight into the law and your position. For advice on this issue and all employment law matters, contact the offices of Toronto employment lawyers Grosman Gale Fletcher Hopkins LLP. We regularly advise workplace parties on a wide range of legal issues. Contact us online or by phone at 416-364-9599 to schedule a consultation.