COMMISSIONS, EMPLOYMENT STANDARDS ACT AND THE COMMON LAW
When someone is terminated from their employment without adequate notice and hires a lawyer to negotiate a better package, it is usually quite a simple thing for the employer and employee to agree what the monthly income was. Clearly, where a salary makes up most of the remuneration, the monthly income is simply a mathematical calculation. A judge awarding damages for lack of adequate notice will attempt to put the employee in the same position she would have been in if she had received proper notice. That exercise becomes a little bit tricky, however, when a significant part of the employee=s pay was made up of commission.
If the terminated employee was earning an average of $2,000.00 in salary and $2,000.00 in commission over the last 6 to 12 months before the termination, the monthly lost income is still fairly simple to calculate; It would be $4,000.00 per month. While the Employment Standards Act, requires an employer only to average the last 12 weeks of pay before termination, a judge at common law can take a different approach. The judge is trying to put the employee in the same position she would have been in if she had received reasonable working notice. In fact, what the judge is trying to do is predict what would have happened if the employee, for instance, had been given 6 months= working notice, rather than being terminated on the spot.
It is up to the judge to decide whether she want to look at the last 3, 6, 12 or 24 months of commission to project what the employee would have earned during the 6-month notice period. If the employee was in a business that had steady sales all year long, looking at 6 months of commission earnings may be adequate. If, however, the employee sold a product which was seasonal in its consumption, like ice, and was terminated just before the busy season, the judge will want to take that into account. Although the commissions for the last few months before the termination may have been low, looking at seasonal commission rates for the last few years will give a better projection of what the employee would have earned if he had been given working notice.
This approach cuts both ways. If the employee=s commission earnings had been strong before the termination, the judge will compensate her at that rate. If, however, the employee was terminated because her sales were bad and her commissions were declining, those numbers will also affect how much money the employee gets. If the payroll records show that the employee=s commission earnings had declined by $200.00 per month from $3,000.00 to $1,800.00 over the last 6 months, a judge will likely assume that the employee=s commissions would have continued to decline at that rate if she had been given working notice of her termination.
Imagine that an employee is terminated because of personality clash but the employee=s commission sales had been increasing every year for the last 5 years. The employer argues at trial that since the person who replaced the terminated employee in their territory only earned $20,000.00 in commission in the 6 months following the employee=s termination, that is all the employee should be awarded. It is completely open for a judge to assume that since the terminated employee had a history of improving their sales on a regular basis, that the terminated employee would have done a better job than the one who replaced him and award damages for lost commission over the notice period at a higher rate.
Occasionally, employers hire a sales person and promise them a particular commission rate. There are often situations where the employee is incredibly successful and is due to receive a large commissions cheque. Suddenly, the employer regrets having promised such a large commission rate although they are happy to have received the purchase order. The employee is terminated in an obvious effort to avoid paying out the commissions earned when the sales take place.
In a situation such as this, even if the commissions would normally have been paid long after the employee=s reasonable notice period would have ended, the Courts will usually compensate the employee for these lost commissions. If the sales were pretty much in the bag as a result of the sales person=s effort before they were terminated, Courts do not like to see employers being unjustly enriched by breaking their promises.
In a sense, the approach of judges in these situations is that the commissions constitute unpaid wages. The employee had already earned the money by the time they were terminated because the sales had been concluded although not yet completed.
While employment contracts are always a good idea, they are especially important when employers are hiring commission sales people. Clearly stipulating the commission rates and what will or will not be compensated if the employee leaves her employment for any reason can avoid a lot of disputes when the relationship ends.
One last word. It is almost impossible for an employer to successfully take the position that they had just cause for terminating a sales person=s employment because sales quotas were not being met. That does not mean the sales people cannot be terminated, but they will be owed pay in lieu of reasonable notice. The Courts have repeatedly found that not being a great sales person does not mean that someone is subject to losing their employment without notice.
As published in the Hamilton Spectator, October 7, 2002