A recent Ontario decision has affirmed that precise language must be used to limit a dismissed employee’s entitlement to incentive compensation that would have been earned or accrued during the common law reasonable notice period, and that such language will be void where it violates the minimum standards of the Employment Standards Act, 2000 [ESA]. In Kerner v. Information Builders (Canada) Inc. [Kerner], the Ontario Superior Court of Justice (the “Court”), awarded an employee damages for the commissions he would have earned during the reasonable notice period, despite clear language in a sales plan which provided that he would not be entitled to commissions in respect of sales that were “booked and billed” after termination.
In Kerner, a regional sales manager received a base salary and was potentially entitled to commission fees from sales. However, two sales plans, executed in 2017 and 2018, set out requirements purporting to restrict the employee’s entitlement to commissions post-termination.
The 2017 sales plan provided:
In order to be entitled to receive a commission you must met [sic] all of the requirements of paragraphs 1 through 3 below […] Unless you do so, no commission is earned, due, owing, or payable to you:
- 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.
- No commissions are payable until the sale has been booked and billed.
- 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 sales plan was amended in 2018 to include the following:
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]
Upon his dismissal, the employee brought an action for wrongful dismissal and sought damages for the commissions he would have earned during the reasonable notice period, notwithstanding that these commissions were for sales that were “booked and billed” after his employment was terminated.
In response, the employer argued that the employee was not entitled to the commissions he claimed as he failed to meet the requirements set out under the sales plans.
After finding that the employee was entitled to eight months’ pay in lieu of common law reasonable notice, the Court considered whether he was entitled to damages for the commissions that he could have earned during the notice period and concluded that the sales plans could not be relied upon to disentitle him.
First, the Court reviewed the common law principle that a wrongfully dismissed employee is generally entitled to damages for the loss of incentive compensation that they would have earned during the reasonable notice period where it is an “integral part of the employee’s compensation”. However, an employee will not be entitled to such damages where they have agreed to a term in a contract or plan that clearly and unambiguously removes that right. The Court noted that in the Kerner case, the parties agreed that the commissions were an integral part of the employee’s compensation.
Consequently, the Court then assessed whether the terms of the sales plans unambiguously altered or removed the employee’s common law right to damages for the commissions he would have earned during the reasonable notice period.
The 2017 Sales Plan
The Court concluded that the 2017 sales plan did not unambiguously remove the employee’s right to damages for commissions in respect of the notice period. In reaching this conclusion, the Court relied on the common law presumption that “the parties intended to apply the law, in absence of clear language to the contrary”. Accordingly, the Court found that the language used in the plan was to be interpreted as referring to a situation involving a lawful termination of employment, where the plaintiff was given reasonable notice of termination, as there was no “clear language to the contrary” demonstrating that the parties had agreed that the limitations would apply to an unlawful termination. As such, for the purposes of the 2017 sales plan, the employee’s employment was deemed to have ended at the end of the reasonable notice period, such that the employee was entitled to be paid commissions earned during that notice period.
The 2018 Sales Plan
The Court concluded that the 2018 sales plan was unenforceable for a few reasons, including:
- Lack of fresh consideration for material change: The Court found that the amendments made in the 2018 sales plan could have significantly modified the employee’s entitlements upon termination and therefore constituted a material change to his employment agreement. The law is clear that where such changes are made, fresh consideration—something of value exchanged for the change—is required. In this case, however, no consideration was given.
- Insufficient communication of change: The Court found that the employer had failed to make the employee sufficiently aware of the change, and therefore he could not and did not accept it. On this issue, the Court referred to evidence that the employer had failed to bring up the change during a call to discuss the 2018 sales plan and in a document summarizing changes that it had distributed to employees.
- Possible contracting out of the ESA: If a provision’s application potentially violates the ESA, it is rendered void. The Court found that the 2018 sales plan was void because it would allow the employer to potentially contract out of its statutory obligation to provide the employee with his full wages during the statutory notice period, which, per s. 1(1) of the ESA, includes commissions. The ESA only permits “contracting out” if a greater benefit is given to the employee. However, the 2018 Sales Plan did not provide a greater benefit.
For the reasons set out above, the Court awarded the employee damages in lieu of reasonable notice for the loss of opportunity to earn commissions during his eight-month reasonable notice period.
Takeaways for Employers
Kerner offers a few important lessons for employers. First, the decision serves as a reminder of the importance of using precise, unambiguous language when drafting incentive plans and/or employment agreements in order to limit the obligation to provide employees with incentive compensation in respect of the reasonable notice period. Specifically, employers that wish to limit such obligations should ensure that the relevant contract or plan clearly and unambiguously:
- provides that employees will not be entitled to damages at common law for the lost opportunity to earn incentive compensation during the reasonable notice period; and
- stipulates that the employee’s employment will be considered to have been terminated when it ceases for any reason whatsoever, whether or not common law reasonable notice of termination is provided, in order to rebut the presumption that the employee’s employment ceased at the end of the reasonable notice period.
Employers should also be cognizant of their minimum obligations under the ESA and ensure that they are not in breach of any statutory requirements. Even precise, unambiguous language will be unenforceable if it has the effect of contracting out of employment standards legislation. Therefore, employers should ensure that any language limiting employees’ entitlement to incentive compensation during the reasonable notice period does not restrict their entitlement to receive their full compensation for the statutory notice period.
Finally, if a material change is made to an incentive compensation plan and/or employment agreement, employers should ensure that the change is clearly communicated to the employee and provide fresh consideration for the change.
This blog is provided as an information service and summary of workplace legal issues.
This information is not intended as legal advice.