Employment arrangements with different kinds of compensation are common and can present a lot of questions when it comes to a termination. In this post, we will look at how the law treats commissions.
Readers of our blog will know by now that when an employee is terminated without cause they are entitled to notice. How much notice will depend on whether or not there is a contract, the age of the employee, the character of the employment, the length of time the employee worked with the employer, etc. We usually talk about notice in terms of number of months.
Notice can be either working notice, where the employee is told that their job will end in a certain number of months and they continue working until that time or pay in lieu of notice, where the employee stops working on the day they are terminated but receives a notice payment representing a certain amount of months of pay. The notice payment can be structured as a lump-sum, one-time payment or as salary continuance, where the employee continues to get paid their regular salary for an amount of time. When an employee is paid commissions, the question of what is their regular salary arises.
Entitlement to Commissions During the Notice Period
Generally, an employee is going to be entitled to notice pay that includes an amount for commissions. Commissions are considered to be “wages” under the Ontario Employment Standards Act (ESA). Attempting to contract out of paying an employee their full “wages” during the notice period may violate the ESA. This will especially be the case if the commissions formed an integral part of the employee’s overall compensation. In general, terminated employees must be “kept whole” during the notice period, this includes payment of wages and continuation of other benefits. The notion of being “kept whole” is the legal way of saying that terminated employees should continue to be compensated as they were when actively at work.
Calculating Commissions During the Notice Period
Given that employees will generally be entitled commissions during the notice period, we are often asked how much they should be? When commissions are based on sales, but an employee is no longer at work making sales, how can the amount of a commission payment be determined? The most common approach is to take an average of the employee’s commissions over the last few years. If commissions are variable based on things like season, then a more logical approach may be to look at figures for specific months in the past year. The employee is entitled to compensation during the notice period that they would have earned had they been at work.
Another issue is the question of commissions earned prior to termination but not yet paid out. In general, terminated employees will be entitled to these.