This article examines whether employers must include commissions, in addition to base salary, when calculating severance pay for sales people.
In addition to paying base salary over the reasonable notice period (i.e., the severance period), must an employer pay an employee their usual commissions over the reasonable notice period?
Yes, an employer is generally required to pay commissions over the whole reasonable notice period if the mode of remuneration of an employee usually includes commissions and the employee would likely have earned these commissions had he or she worked the reasonable notice period.
How do the courts determine how much commissions the employee should be paid over the reasonable notice period?
The courts will generally prorate commissions based on the last year, or some other period if necessary such as the last three years (i.e., if there were unusual circumstances in the last year such as a maternity leave or bad market conditions). In other words, if someone is entitled to a severance or reasonable notice period of six months, the courts will award him or her the same commission payments he or she received last year (or some other year if necessary) for a period of six months, prorated. In even simpler terms, if someone who made $40,000 in base salary but made $100,000 last year in commission payments, and was subsequently awarded a six-month notice period following termination, he or she would be owed six months of full pay, being $20,000 base salary and $50,000 in commission.
Alternatively, in very unique circumstances (such as new employment) where it is not practical to base severance or reasonable notice period commissions on past years, the courts will find creative ways to project what an employee would have earned in commissions had he or she worked the period of reasonable notice. For instance, legal scholars have noted the following methods to determine what the employee would have earned in commissions had he or she worked the period of reasonable notice:
- commissions earned by the employee’s replacement;
- projections based on the general sales results of the company; and
- the sales in the period of notice. (The Law of Dismissal in Canada, Third Edition).
However, a court will not award or limit commissions over the reasonable notice period if the employer can prove the employee would not have earned or earned substantially less commissions had he or she worked the reasonable notice period. For example, in one case, an employee was fired because he lost his only account. Thus, had the employee worked the reasonable period, he would have made no commissions, and so the court in that case awarded no commissions over the reasonable notice period.
Can an employer contract out of paying commissions over the reasonable notice period?
Generally, an employer cannot use a termination clause in an employment contract to limit reasonable notice pay to just base salary (i.e., no commissions). This is because under employment standards minimum legislation (i.e., the Ontario Employment Standards Act), commissions are treated as “wages” and any attempt to contract out of the payment of “wages” is void. This means the termination clause could not be enforceable.