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Employee Commission Plans

September 21, 2020

By Alex Levy

ENSURE THE PLAN MATCHES YOUR INTENTIONS

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Commissions are a valuable tool for employers to incentivize employees. A commission plan should be clear and concise and presented with the job offer to the employee.  The plan should describe when commissions are earned, whether the employer can change the commission structure, if commissions include vacation and/or holiday pay and if commissions are payable on termination of employment.

A well drafted commission plan can save an employer time and money by preventing future disputes about the plan details, while allowing the employer the flexibility to tailor the plan to its changing business requirements.

This article will focus solely on commissions.  A follow-up article will cover bonuses; both discretionary and non-discretionary.

I. The importance of defining when commissions are “earned”

Under the Employment Standards Act (Ontario) (the “ESA”),[1] commissions are considered wages. Employers are required to pay to an employee all wages earned during each pay period.[2]

Accordingly, employers must define clearly when commissions are earned in their commission plans.

In the case of Bakshi v. Global Credit & Collection Inc.,[3] the court affirmed that an employer may define when commissions are earned in an employment contract or commission plan.

In Bakshi, Global Credit & Collection Inc. (“Global”)’s largest customer, Capital One, terminated its agreement with Global. Due to this termination, Global laid off 368 employees. Shortly following the termination of the agreement, Capital One paid to Global a $5.7 million settlement “to resolve any and all existing and potential disputes between them…”.[4]

The employees who Global laid off commenced a class action suit against Global for unpaid commission amounts, totaling approximately 15% of the settlement with Capital One.

The court ruled in favour of Global, noting that under the commission policy, commissions were only payable (i) when Global was paid; and (ii) only to employees who exceeded their targets. Further, the court noted that under the commission policy, commission payments were payable at the discretion of management.

Accordingly, even if an employee had met his/her target, it was not Global’s practice to credit amounts received to an employee after that employee had been reassigned to a different account (or in this case, laid off).

For the court, Global’s commission plan and conduct were clear that no commissions were payable on the settlement amount. This highlights the importance of a well drafted commission plan.

Courts will uphold a commission plan which allows an employer discretion and flexibility in carrying out the plan. However, an employer needs to exercise its discretion reasonably and should not rely on very broadly drafted discretionary language in a commission plan.

II. Commissions and Vacation Pay

As noted above, commissions are considered wages under the ESA.

Subject to certain exceptions, employees are entitled to receive vacation pay on wages earned as follows:

  • 4% wages, if the employee’s period of employment is less than 5 years; and
  • 6% wages, if the employee’s period of employment is 5 years or more.

Often employers insert a provision in a commission plan that commissions include vacation and holiday pay. However, many employers may be surprised to learn that even where a plan includes a similar statement, an employee may still be entitled to receive his/her commissions plus vacation and/or holiday pay.

This is exactly what happened in the case of Kinch v. Dufferin Communications Inc.[5] In this case, Karen Kinch(“Kinch”), was employed by Dufferin Communications Inc. (“Dufferin”) from 2002 until 2012.

Upon the termination of Kinch’s employment, Kinch brought an action against Dufferin for unpaid vacation pay for the years 2006 to 2012, an amount of $35,396.02. While Kinch was initially unsuccessful at trial, she appealed to the Divisional Court (Ontario), which found in her favour.

Kinch’s employment contract contained the following provision:

You will be paid commission at a rate set out in Schedule B (Commissions). This amount includes statutory amounts for vacation/holiday pay as well as statutory pay.[6]

In finding in favour of Kinch, the Divisional Court highlighted two key principles (paraphrasing):

  1. the provisions of the Canada Labour Code (the “CLC”) with respect to vacation pay are mandatory and cannot be excluded by contract; and
  2. the Supreme Court of Canada has made it clear that the purpose of the CLC is to protect employees and encourage employers to meet their minimum obligations thereunder. Employees are generally at a disadvantage in terms of bargaining power.[7]

While the ESA is different than the CLC, its core principles are the same and its wording is sufficiently similar. The decision in Kinch probably applies to employees covered under the ESA.

The Divisional Court stated that if the employer wants to pay commissions which include vacation pay, then:

I. the employer must demonstrate that the employee is aware of his/her vacation entitlements under respective legislation (in this case the CLC); and

II. the employee must acknowledge that he/she is receiving a benefit that is either equal to or greater than those entitlements.[8]

Following these guidelines will support the employer’s position but does not guarantee an employer will be successful.

In determining whether vacation pay was actually included in commissions, the Divisional Court also looked at T-4 slips issued by the employer, pay stubs and whether the commission plan had been increased upwards.

Employers that are including vacation pay in commission payments should have their employees sign an acknowledgment evidencing their agreement to this at the outset and ensure their payroll practices are consistent with this practice.

III. Commissions and Termination of Employment

Generally, upon termination of employment without cause, an employee is required to be put in the same position that he or she would have been in if he or she worked to the end of the notice period.[9] This can become contentious when the former employee was paid commissions.

Barring clear and unambiguous language to the contrary, an employee whose employment has been terminated, may be entitled to receive commissions that would have been payable to that employee post-termination, once the employer has received payment from those sales.

In the case of Carroll v Purcee Industrial Controls Ltd.[10] Matthew Carroll (“Carroll”) sued his former employer, Purcee Industrial Controls Ltd. (“Purcee”), for commissions on amounts received by the employer after his termination. The court decided these amounts were received by Purcee as a direct result of Carroll’s efforts. There was no written commission policy, although the industry had a history of only paying commissions once the employer received payment from the customer.

Following the case of Micallef v Image Processing Systems Inc.,[11] the court held that:

“…a term in an employment contract requiring that an order be paid before the salesperson receives his commission does not necessarily imply that the salesperson’s entitlement to that commission crystallizes at the date the customer pays the invoice. Rather, it is entirely reasonable to conclude that the employee’s entitlement to receive a commission crystallized at the date the sale was effected, even if payment is delayed until sometime thereafter. At that point, the employee’s job has been performed, and the employer is set to reap the benefit of the employee’s labour once the customer remits payment.”[12]

The court acknowledged that a term in a contract or an employer’s policy could potentially preclude an employee from collecting commissions which, if not for the termination of that employee’s employment, would have otherwise been earned and payable to that employee post-termination. However, no such term or conduct had been brought to the attention of the court or, more importantly, to Carroll during his employment. Accordingly, Carroll was entitled to commission payments on amounts received by the employer post-termination which were the result of Carroll’s efforts.

A lesson for an employer is that if it hopes to limit an employee’s entitlement to commissions post-termination, there needs to be clear and unambiguous language of this intention in an agreement or commission plan, such term needs to be brought to the employee’s attention, and the company’s business practices should follow this plan.

This discussion does not mean that without a policy to the contrary, an employee will always be entitled to commissions after he or she is terminated. There are many circumstances to be analyzed in determining an employee’s right to commissions. This is just a discussion of some protective measures that an employer can take.  If you have questions or concerns about your company’s commission plans, please seek legal counsel.

For more information relating to commission agreements and policies, please contact Alex Levy at 416.860.8016 or alevy@houserhenry.com.