A recent decision of the Ontario Superior Court of Justice serves as a cautionary tale for employers that they can face wrongful-dismissal liability for commissions/incentive compensation even when it is not provided pursuant to any formal written policy or plan. This serves as an important reminder to implement well-drafted plans/policies before providing employees with new forms of compensation. In Salam v Ontario Research and Innovation Optical Network [Salam], the court awarded a former employee commission for the portion of the year preceding his dismissal and damages for the commission he would have earned during the 6-month reasonable notice period, despite finding that the employer’s draft commission plan was never approved or implemented.
Background
In July 2017, Mr. Salam commenced employment with the Ontario Research and Innovation Optical Network (“Orion”) in the role of Senior Product Sales Solution Manager, but he was quickly promoted to Director of Products and Business Solutions. Mr. Salam was ultimately dismissed without cause in October 2019, at which time he was 49 years old, earned a base salary of $145,860, and had just over two years of service.
Mr. Salam alleged that he was verbally promised sales commissions equal to up to 15% of his salary before he took the job, but his employment contract simply stated that he would be “eligible for commission plan, based on annual sales results at the end of each fiscal year”, without any further details. Additionally, his contract also provided that he was entitled to a performance bonus of up to 5% of his salary.
A draft commission plan was circulated at Orion during Mr. Salam’s employment which contemplated commissions of up to 15% of an employee’s salary, subject to certain revenue quotas being achieved. However, this draft plan clearly specified that it would only be effective if approved by the CEO, and it was never ultimately approved. Nonetheless, Orion provided Mr. Salam with multiple employment confirmation letters signed by its CEO stating that he was entitled to 15% commission and an additional bonus of up to 5%.
Following his dismissal, Mr. Salam commenced an action against Orion for wrongful dismissal and unpaid wages, in which he claimed 12 months of pay in lieu of reasonable notice, along with over $600k in unpaid commissions under the draft commission plan (which he argued to be binding).
In response, Orion admitted that the termination clause in Mr. Salam’s employment contract was legally unenforceable and that he had been wrongfully dismissed but contended that Mr. Salam was only entitled to five months’ reasonable notice. Further, Orion argued that (i) Mr. Salam was not entitled to any commissions because the commission plan was never finalized/approved; and (ii) the additional payments/compensation that Mr. Salam received were discretionary performance bonuses.
The Court’s Decision
The court ultimately held that Mr. Salam was entitled to six months of reasonable notice and unpaid wages, including damages for commissions he would have earned during that period and unpaid commissions for the portion of the fiscal year that he worked prior to his dismissal, despite finding that the commission plan was never approved and was not legally enforceable.
Although the court found that the draft commission plan was not enforceable, it also found that Mr. Salam’s employment contract created a commission plan by stating that he was “eligible for a commission plan” (despite not specifying any rate). On the other hand, the court rejected Mr. Salam’s claim that he was entitled to over $600,000 in commissions because this was predicated on the draft commission plan being binding, and the court found that it was not.
Moreover, the court determined the amount of commission that Mr. Salam should receive for the reasonable notice period based on the average commissions he had earned in the previous two years, prorated for the six-month period. However, the court also ruled that Mr. Salam had partially mitigated his damages by obtaining a lower paying job approximately four months after his dismissal, and that his mitigation earnings had to be deducted from the damages that he was otherwise entitled to.
As a result, the court awarded Mr. Salam the sum of $58,419.52 in pay in lieu of reasonable notice and unpaid wages, consisting of base salary, an additional 10% base salary for the loss of benefits, and pre- and post-dismissal commissions.
The Bottom Line
As Salam demonstrates, employers can face additional wrongful dismissal liability if they provide employees with new forms of compensation (e.g., commissions or other incentive compensation) without first implementing a well-drafted plan or policy governing such compensation.
Although employers cannot contract out of their employees’ right to receive commissions earned prior to their dismissal or during a statutory notice period of up to eight weeks under employment standards legislation, a well-drafted plan/policy can restrict employees from being entitled to damages for the lost opportunity to earn commissions, bonuses, or other incentive compensation during the remainder of a common law reasonable notice period. Thus, employers should ensure they have appropriate policies/plans in place before providing new forms of compensation, in addition to having the termination clauses in their employment contracts reviewed regularly by an experienced lawyer to ensure that they have not been rendered unenforceable due to changes in the law.
If you require assistance with minimizing your business’ potential liability when ending employment relationships, please do not hesitate to contact us for expert legal advice and guidance.
