Employment contracts should clearly set out commission structure
In most situations where employment ends, figuring out what is owed to the employee is quite easy: They are owed their outstanding earnings up to the date of resignation as well as outstanding vacation pay.
If it were always this simple, however, there would be no work for employment lawyers. People who earn commissions by making sales always present an interesting dilemma. If you resign, do you get paid for the deals signed up to the date of resignation or only for those where the goods have been shipped and the bill paid as of that date?
What if the deal was not signed but you worked very hard in making it happen, and soon after, the deal closed?
This last issue was explored in a recent case from Ontario.
A man we will call Bill was a specialist in real estate development. He signed a deal with a real development company that gave him no salary. He agreed to work if the employer gave him 50% of the profits on all the deals he closed and provided him with a cell phone. Over the following year, he worked on many potential purchases for his employer company but all of them were declined. He spent most of his time during that year working on one particular deal to buy an office building. The employer was interested in this opportunity and two or three offers were made while Bill was still employed there. By the time he resigned a year after he had started, no deal had been struck.
Very soon after, however, the employer made yet another offer for the property and purchased it. Two years later they sold it at a profit of $1 million. Bill brought a law suit claiming $500,000, half of the profits. Bill won.
The judge in this case very carefully examined all the efforts Bill had made over the course of his one year of employment to facilitate the purchase of this office building. The court found that where a company accepts and benefits from the work performed on its behalf by an employee, in the absence of an agreement to the contrary, the company has to pay for those efforts.
It’s important to note that it probably had some effect on this trial judge that Bill wasn’t working on any salary. It could not be said by the employer that Bill was compensated for the efforts he had made with respect to the office building by his salary and that if he wanted to benefit from it he should have stuck around.
Employer should be aware that in these kinds of cases it will be up to the employer to prove that the sales person is not entitled to commissions after they resign or are terminated or, in the alternative, that their entitlement is limited. A simple provision indicating that sales people are only entitled to commissions on deals that are contractually confirmed before the date of their resignation or the date they are advised of their termination will suffice.
Employers should remember, on the other hand, that intentionally terminating somebody’s employment the day before a big deal they have been working on is signed will probably not succeed, regardless of the terms of the contract.
Courts recognize that there is a power imbalance between employees and employers and will not allow employers to deprive employees of income through a technicality.
If the employment contract clearly sets out how and when the employee becomes entitled to commission payments and deals specifically with the resignation or termination scenarios, everyone can be on the same footing.
The employee will know when to time their resignation and the employer will know the precise consequences of a termination.
Litigation over unpaid commissions is complicated and can become expensive for both the employee and the employer. Get it in writing or pay a lawyer later.