"Earned" Commissions Found to Cease on Employee's Last Active Day of Employment

A recent decision of the British Columbia Supreme Court has found that an employee was entitled to only those commissions that had been earned up to the date he was advised of his termination.  Without relying on legal presumptions or maxims, the Court concluded that the clear and unambiguous terms of the employment agreement led to this result.
 
In Sciancamerli v. Comtech (Communication Technologies) Ltd., the plaintiff was employed by the company as a Regional Sales Manager for British Columbia, selling technology infrastructure to other businesses.  After only 10 months, his employment was terminated on October 10, 2013, and he was provided only 1 week of severance pay.  He sued for wrongful dismissal, claiming reasonable notice well in excess of what was provided, as well as the commissions and benefits he would have received during the notice period.  Based on his age, length of service and the relatively specialized nature of his role, the Court found that he was entitled to five (5) months notice of termination.

The Court then proceeded to consider what, if any, commissions the plaintiff was entitled to.  The plaintiff claimed that he should receive all commissions that were closed during the notice period, while the employer took the position that he was entitled only to commissions on those sales that had been invoiced by or before the last day he was at work.  The employer had already paid commissions on all of the plaintiff's invoiced sales prior to the trial.  The Court observed that the starting point for the analysis was to look at the express terms of the employment agreement.  The commission plan documentation (incorporated into the agreement by reference) stipulated that the timing for payment of commissions was when the sale was "closed, won and invoiced".  Upon further analysis, it was clear that this was the basis upon which the employer determined what commissions had been "earned".  The Court then had to consider the "termination" provision in the commission plan, which stated:

Participants who [are terminated]… whether or not for cause will be paid their base salary through the agreed upon termination date. In addition, the Participant will be eligible only for commission payments earned prior to their last date of employment….

The Court noted that base salary was payable through "the agreed upon termination date", while the employer was only obligated to make commission payments "earned prior to [the Participant's] last date of employment".  The Court found that the difference in the verbiage in these two sentences indicated an intention that the two phrases must have different meanings.  Although it was clear that the parties intended that an employee would receive payment of salary through the entire reasonable notice period (i.e., "through the agreed upon termination date"), the expression "last date of employment" was intended to mean the last day that the individual was at work.  Accordingly, the plaintiff's entitlement was limited to commissions on those sales that had been invoiced by or before October 10, 2013, as argued by the employer.  Given that these amounts had already been paid, there was no outstanding commission to be paid.

This decision highlights the importance of ensuring that employment documents clearly delineate an employee's entitlements to things like commission, stock options and other incentives following the end of the employment relationship.  If the employment agreement and incentive plan documentation stipulate that entitlement ceases at the end of the active employment relationship, it is much simpler and cleaner to calculate the final payments due to a departing employee.  Consideration should be given to defining terms like "earned", "termination date", and "last date of employment" to avoid any misunderstandings at a time when emotions are often running high.

Do you need assistance reviewing your employment documentation?  Need advice on drafting compensation and incentive plans to ensure clarity?  Contact Lance Ceaser for expert guidance.

 

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.