Jul 28, 2020  By John Hyde

Be Careful What you Contract For

Employee awarded nearly $140,000 in commissions during notice period

Freedom of contract is a hallmark of the free market system.  In its most basic form, the idea is that parties should be free to choose the terms of their contracts without government restriction or intervention.   

The principle is a noble one and, all else being equal, has been integral to the viability of our economic system. If I agree to sell you a good or service at an agreed upon price, why should the government intervene?

But circumstances are not always equal and, as our courts have long noted, the employment relationship is one where the parties may not be negotiating on a level playing field.  For many employees, the freedom to contract amounts to a choice between agreeing to all of the employer’s terms, or not being employed at all.

On that basis, Canadian federal and provincial governments have enacted legislation which guarantees employees certain rights, by setting out the bare minimum terms that employees can agree to – such as notice of termination, minimum wage, and entitlement to vacation. Indeed, Ontario’s Employment Standards Act (ESA) has a “no contracting out” provision which reinforces that, even if an employee freely agrees to certain terms of employment, if those terms are less than what the ESA provides, the agreement is void. This is the case even if the agreement can only theoretically breach the ESA. 

Our courts have also intervened in the employment relationship by imposing reasonable notice periods and other entitlements when there is no evidence of a written agreement at all.  Even if there is a written agreement, where the contract is not sufficiently clear, courts will interpret it against the party who drafted the agreement, which is almost always the employer.

Further, if an employer wants to make a fundamental change to an employee’s contract, they must sufficiently bring that change to the employee’s attention and, provide the employee with something of value in return for that change – known as “fresh consideration.”

With this backdrop, an Ontario court’s recent decision to award an employee nearly $140,000 in commissions, confirms that these long-entrenched principles remain stronger than ever in workplace contractual disputes.

The dispute in Kerner v. Information Builders (Canada) Inc., 2020 ONSC 2975  centred around commissions owed to an employee, which he could have earned during the notice period, following his termination.

The employee, David Kerner, was not a salesperson himself, but managed a sales team and, his commissions were based upon the performance of the salespeople who reported to him. Kerner signed a Sales Plan in 2017 which stated that, in order to receive commission, he had to be employed at the time the sale was booked and billed.  A 2018 Sales Plan further confirmed that no commissions were payable during the statutory notice period unless the sale transaction was booked and billed prior to his termination.  

Yet, despite Kerner having not booked and billed any of the commissions he was claiming prior to the termination date (as he had ostensibly agreed to), the court awarded him commissions anyways. 

What happened to freedom of contract here?

For starters, since courts imply reasonable notice periods into every contract of employment, the failure to provide reasonable notice of termination is, in and of itself a breach of contract. The court will then look to determine what position the employee would have been in, had the employee been given the proper notice of termination; or in this case, what commissions would Kerner’s team had booked and billed, if Kerner continued to be employed for an additional 8 months.

Further, the 2018 Sales Plan was found to be problematic for several reasons.  Firstly, it did not effectively communicate its changes (from the 2017 plan), which purported to affect Kerner’s compensation upon termination. Secondly, the employer did not provide Kerner with fresh consideration for the change, as would have been required. And finally, since the ESA requires that termination pay include commissions, the 2018 Sales Plan was determined to be an attempt to contract out of the ESA, by stating that commissions were not payable during the statutory notice period.

For these reasons, despite the language of the sales plans, Kerner was entitled to the ‘loss of opportunity’ to earn commissions during the 8-month notice period, which was determined to be $136.863.76.

The lesson here is that employment contracts are much different than commercial contracts. Even if the parties think they have come to a meeting of the minds on the key terms, if those terms are inconsistent with the law, they could very well be struck down and dramatically increase an employee’s entitlements upon the cessation of the employment relationship.

Now more than ever, employment contracts must be drafted and reviewed with the utmost scrutiny. Contact the specialists at Hyde HR Law today, for expert legal advice and interpretation of your employment agreement(s).  

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