Limitation Period Starts When Reduced Commission Paid, Not When Employee Advised

Where an employer unilaterally changes the terms of a commission scheme, when does the limitation period start to run?  Must the employee immediately commence an action as soon as he/she is notified of the change, or can they wait until the employer fails to honour the original terms of the commission arrangement?

Under the Ontario Limitations Act, a claim must be commenced by or before the second anniversary of the claimant discovering that "damage" has occurred.  If the claim is not commenced within 2 years, it is untimely and will be dismissed.

In Ali v. O-Two Medical Technologies Inc., the claimant, Ali, was employed by O-Two as a medical engineer, but he also had a separate commission agreement with the employer. Ali negotiated a large sale to the Iraqi Ministry of Health in early December 2006, but one week later O-Two advised him of a unilateral reduction of the commission rate that he would receive on sales.  The parties met and exchanged correspondence over the coming months, but O-Two maintained that any commission on the sale to Iraq would be at the lower rate.  Ali resigned from O-Two effective September 10, 2007. Commissions on the sale to Iraq became payable in October 2007, and were paid out on November 23, 2007, at the lower rate set by O-Two.  Ali commenced a claim on September 16, 2009.

O-Two brought a motion for summary judgment, arguing that Ali's claim fell outside the 2-year limitation period, relying on its notification of the change in commission which occurred in December 2006.  The motions judge granted the motion and dismissed Ali's action.  Ali appealed.

The Ontario Court of Appeal upheld the appeal, finding that Ali's damage had not occurred until he actually received the payment that was alleged to be in breach of the commission agreement.  While he had the option of treating the change to the commission scheme as a "repudiation" of the agreement, and could have sued immediately, he was also entitled to insist on performance of the agreement in accordance with its original terms and could wait and see whether O-Two would honour its obligations.  He elected to take the latter course, and so his "damage" was not discovered until O-Two made the payment at the lower commission rate.  On this theory of when he incurred damage, his action was commenced within the limitation period.

While this decision is tightly focused on a legal issue, it is important for employers to recognize when an employee's claim may arise and how long the employee may have to commence a claim.  If the employee immediately rejects the unilateral change to a term of the relationship (and assuming such a change does not amount to constructive dismissal) and accepts the employer's "repudiation" of the agreement, the clock starts to run right away.  However, if the employee insists on the original bargain and treats the agreement as still in force, the limitation period does not commence until the point when the employer implements the change (e.g., when commission or bonus is paid at a reduced rate unilaterally introduced by the employer).  Depending on the timing of payments under commission or bonus schemes, this may significantly extend the time in which a claim can be brought.

Do you have questions about how to implement changes to employee terms and conditions of employment?  Wonder what to do when your compensation has been reduced unilaterally?  Contact Lance Ceaser for assistance.