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To Pay or Not To Pay: Bonuses & Commissions After Termination

By November 3, 2020October 21st, 2021Employment Law

A couple of recent cases have clarified and solidified employees’ rights to bonuses and commissions during their notice of termination period.

In many instances, a contract attempting to limit an employee’s rights to bonuses and commissions after termination would include language like “the employee is not entitled to the commission/bonus unless actively employed” and “the employee is not entitled to the commission/bonus upon termination, whether that termination is with or without cause.” A 2020 federal case, and another in Ontario, have exposed a gaping hole in this kind of language.

What happens if the employee is not actively employed (i.e. is terminated and therefore not physically present on the job) because of a termination that was neither with cause nor without cause, but rather a wrongful or unlawful termination?

Background

Let’s start by clarifying some key points about employees’ rights to notice of termination in general.

Minimum Rights Under the ESA

It is essential to know that every employee in Ontario is entitled to a minimum notice of termination (or pay in lieu of notice) under the Employment Standards Act (ESA) of approximately one week for every year worked, up to a maximum of eight weeks.

Common-Law Rights

While the ESA entitlements are the minimum standards, the common law (judge-made law) says nothing can prevent an employer from having to provide a terminated employee with the maximum common law standards without a clear contract stating otherwise. The amount of notice each employee is entitled to under common law depends on many factors. Still, the amount of notice, or pay in lieu of notice, generally given to an employee is approximately one month for every year worked up to 24-30 months.

Whatever the notice period, if the employee receives notice of termination, then they continue to work through the notice period and receive any entitlements (including bonuses and commissions) as they come due. But what if an employer provides pay in lieu (instead) of notice of termination? Then the employer must also give any other pay, benefits, bonuses, incentives or other entitlements the employee would have otherwise earned if they were employed during the notice period.

Wrongful Termination

Suppose an employer fails to provide an employee with the proper amount of notice or constructively dismisses an employee (where an employer’s actions are such that they can reasonably be taken to be ending the employment relationship). In that case, the employee is wrongfully terminated. A wrongfully terminated employee can sue the employer for damages to compensate them for the wrongful termination. For more information on wrongful termination or constructive dismissal, please read our other blogs on the topic.

Paying Bonuses and Commissions to a Terminated Employee

The ESA requires that all three of the following be adhered to during an employee’s minimum notice period [s.60, ESA]:

  • the employee must be paid their regular wage
  • no term(s) of the employee’s employment may be changed (including payment of commissions and bonuses)
  • all benefit contributions must continue

Under the common law, employees are entitled to bonuses and commissions during the notice period unless they have a clear contract that says otherwise.

Now, let’s delve into the two cases for further exploration of this issue.

The Ocean Nutrition Case – Bonus Payable After Employee Quit

Matthews v. Ocean Nutrition Canada Ltd. is the most recent case released by the Supreme Court of Canada (SCC) dealing with this subject. In this case, Matthews was employed as a chemist by Ocean Nutrition Canada for about 14 years. It was found by lower courts (and not contested on appeal to the SCC) that he was “constructively dismissed”. This was because, in the last few years of his employment, a new COO subjected Matthews to a “campaign to marginalize” him. Their behaviour included reducing Matthews’s responsibilities, lying to him and ignoring his requests to speak. This “campaign” took place until 2011 when Matthews found new employment and left Ocean Nutrition.

As a senior employee, Matthews was part of the company’s long-term incentive plan that would trigger significant payments to employees if it were sold. As it turned out, Ocean Nutrition was sold about 13 months after Matthews left the company. Had he still been employed there at the time of the sale he would have been entitled to approximately $1.1 million.

Matthews sued Ocean Nutrition, claiming constructive dismissal, and sought wrongful dismissal damages that included loss of pay, bonuses and benefits. Ocean Nutrition denied that Matthews was entitled to the incentive plan bonus because “he was not actively employed” when the sale triggered the incentive plan. The incentive plan had the following clauses:

2.03 CONDITIONS PRECEDENT:
ONC shall have no obligation under this Agreement to the Employee unless on the date of a Realization Event the Employee is a full-time employee of ONC. For greater certainty, this Agreement shall be of no force and effect if the employee ceases to be an employee of ONC, regardless of whether the Employee resigns or is terminated, with or without cause.

2.05 GENERAL:
The Long Term Value Creation Bonus Plan does not have any current or future value other than on the date of a Realization Event and shall not be calculated as part of the Employee’s compensation for any purpose, including in connection with the Employee’s resignation or in any severance calculation.

In the initial trial, Matthews succeeded in proving that he was wrongfully terminated and entitled to the bonus that vested after departing the company. Then, the Court of Appeal of Nova Scotia agreed that he was wrongfully terminated but not entitled to the bonus. Finally, Matthews appealed to the SCC. The SCC allowed the appeal and restored the award of the initial trial judge for the bonus. The SCC’s reasoning was straightforward:

  • When employees sue for damages for constructive dismissal, they are not claiming the disputed benefits themselves but are claiming damages for the lost opportunity to earn such compensation throughout the notice period.
  • Words such as “full-time” and “active”, as found in clause 2.03, will not suffice to remove an employee’s common law right to damages because, had Matthews been given proper notice, he would have been “full-time” or “actively employed” through the reasonable notice period.
  • The language that aims to limit entitlements upon termination “with or without cause”, such as those in clause 2.03, will not suffice either because Matthews suffered an unlawful termination – it was neither with nor without cause. In other words, the exclusion clauses did not clearly cover the exact circumstances which arose and are therefore not effective in ousting Matthews’ common law rights to damages for unlawful termination.

The Kerner Case – Commissions Payable for Sales Not Made by the Employee

In Ontario, whether commissions are payable during a notice period came up in Kerner v Information Builders (Canada) Inc. Kerner was an employee who had a base salary and earned commissions for each sale “booked and billed” by him. Upon termination, Kerner was not provided with the proper amount of notice. His termination was therefore held to be an unlawful or wrongful termination. The judge found that Kerner was entitled to eight months of notice at common law. Still, the real point of contention was whether Kerner was also entitled to damages equal to the commissions earned during those eight months.

A “Sales Plan” governed the commission payments. There was a “2017 Sales Plan” which read:

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 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 wording was amended in the “2018 Sales Plan” before Kerner’s termination, as follows:

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]

The Judge considered previous case law and determined that the analysis to be undertaken is a two-step one:

  1. [Determine the employee’s] common law rights 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; and

  2. 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.

In undertaking the above analysis, Judge Pollak found that Kerner’s commission formed an integral part of his compensation. Thus, he would be entitled to it during the notice period in the absence of a contract unambiguously altering or removing his entitlement.

The Judge also analyzed the words of the 2017 contract. She found that the term “you must have been a procuring cause of the sale and complied with all other applicable requirements” must be interpreted as referring to a situation where there has been lawful dismissal (where the employee is given reasonable notice of dismissal). As for the 2018 plan, the judge found that it was invalid because:

  • there was no new consideration for the change made in 2018, and
  • Kerner was not made aware of the changes to this new contract and did not explicitly accept this material change to the agreement.

In the end, Judge Pollak awarded eight months’ damages to Kerner in place of reasonable notice. The damages included commissions and benefits to the tune of close to $300,000.

Bottom Line

If an employer wishes to minimize an employee’s rights to bonuses or commissions during the common law notice period, having a written employment contract is paramount!

But beware! Even with a written contract, the case law is now crystal clear. The language intending to minimize an employee’s common law right must be unequivocal (covering the exact scenario, including unlawful termination) and unambiguous. The SCC in Ocean Nutrition confirmed a long-standing tenet of employment law: ambiguous language will always be interpreted in favour of the employee. This is especially so where the contract is not negotiated by the employee, as in the Kerner decision.

Do you have any employees that receive production-based bonuses? If you have employees who are paid any type of bonus or commissions, you are exposed to substantial employee liability. It is vital that you

  • put your employees on a well-written contract, and
  • review existing employment contracts to ensure no ambiguity could be used to your detriment.

If you have employment agreements that are outdated or not properly drafted, OR if you don’t have employment agreements at all, then please contact us. We are happy to help with employment contracts, office policy manuals and any other employment issues. DMC is dedicated to helping dentists understand and minimize the risks associated with being an employer. Send DMC an email or give our Employment Law Team a call directly at 416-443-9280 extension 206.

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