In Salam v. Ontario Research and Innovation Optical Network, the Ontario Superior Court of Justice (“ONSC”) held that a draft commission plan, which was circulated but never finalized or approved, was not enforceable. However, this did not bar the employee’s entitlement to commission payments. The ONSC found that the employee was still owed commissions based on the employment agreement and the parties’ conduct. The decision highlights the importance of ensuring consistency between contractual terms and actual compensation practices, especially where commissions or incentive-based compensation is involved.

Background

The employee was employed as a Senior Product Sales Solution Manager. His employment agreement provided for a base salary of $130,000, eligibility to participate in a commission plan, and a discretionary performance-based bonus. The agreement stated that commissions would be “payable based on annual sales results at the end of each fiscal year.”

Although several discussions about a commission structure took place, no formal or finalized commission plan was ever implemented. The employer circulated a draft commission plan in early 2019, but the document was never signed or approved.

Following the termination of his employment, the employee, believing he was already being compensated under the draft commission plan, sued for wrongful dismissal, claiming over $600,000 in unpaid commissions and 12 months of reasonable notice under the common law.

Decision

Termination and Reasonable Notice

The ONSC found that while the employee was eligible for commissions, the draft commission plan was not enforceable as:

• The draft commission plan was never finalized and approved;
• The employer consistently treated the commission plan as a proposal and not an active policy;
• The essential terms of the commission plan could not be determined with a reasonable degree of certainty; and
• There was no evidence that the parties had a “meeting of the minds” on the essential terms of the commission plan.

Despite the unenforceability of the draft commission plan, the Court found that the employment agreement, interpreted in light of the parties’ conduct, supported the employee’s entitlement to commission payments of up to 15% of base salary.

The employer argued that the past bonuses the employee received were “performance bonuses” rather than commission payments, but the Court found that the payments fell squarely within his commission entitlement of up to 15% of his base salary.

The employee was awarded commissions for the portion of the fiscal year worked prior to his dismissal, as well as six months of reasonable notice.

Takeaways for Employers

This case highlights several key lessons for employers using commission or incentive-based compensation structures, and how to properly implement them to avoid confusion over employee entitlements:

1. Ensure Entitlements Are Accurate

Employers should ensure that any additional entitlements they intend to provide are clearly defined and explicitly incorporated by reference into the employment agreement. Draft or placeholder plans, especially where the terms have not been finalized, can lead to misunderstanding. Employers should clearly communicate the status of such documents to employees.

2. Align Practices With Written Rules

Employers should ensure that any internal compensation practices reflect and support an employee’s written entitlements. Inconsistencies between written agreements and an employer’s actual conduct can render the written language ineffective in limiting the entitlement, where an employer’s past practice indicates otherwise.

3. Take Formal Steps To Implement Commission Or Bonus Plans

If a commission or bonus plan is introduced after the employment agreement is signed, employers should take steps to formally implement it, including obtaining an employee’s written agreement and providing fresh consideration for signing.

This blog is provided as an information service and summary of workplace legal issues.

This information is not intended as legal advice.