Ontario court awards employee longer reasonable notice period due to pandemic's impact

It's a game-changing case for Ontario employers

Ontario court awards employee longer reasonable notice period due to pandemic's impact

by Rhonda Levy and Monty Verlint of Littler

In Kraft v. Firepower Financial Corp., 2021 ONSC 4962 (Firepower Financial), an employee brought a motion for summary judgment seeking 10 months’ salary in lieu of notice, commissions and bonuses, and holiday and vacation pay in a wrongful dismissal action.  Notably, in assessing the reasonable notice period, the court awarded the employee one month more than it would have otherwise because of the COVID-19 pandemic’s impact on his ability to secure new employment and the degree of uncertainty it caused. 

In addition, the court awarded the employee commission on a pending transaction that the employee had identified for the employer, which closed six months after the employee’s dismissal from his job.  In doing so, the court noted that all of the employee’s work on this transaction was completed prior to his dismissal, the transaction closed during what should have been the employee’s notice period, and commission earned on the transaction was included as part of the employee’s “wages.”  The court declined, however, to award the employee commission on a second pending transaction, noting that it was unknown “if and when” it would close, the employee’s notice period had ended, and the employee’s entitlement to wages “does not go on forever.”   

Background

The employee began to work for the employer in 2014 and was dismissed without cause in March 2020, at the beginning of the COVID-19 pandemic.  At the time of his dismissal, the employee was a specialized salesperson in investment banking focused on mergers and acquisitions, receiving a base annual salary of $70,000, commissions, incentive payments, and vacation and health benefits. The employee earned commissions for identifying and presenting opportunities to the employer that resulted in fees payable to the employer.  He also received incentive income paid quarterly based on his percentage of the “Bonus Pool’s” fee-generating activities.

Commissions on Pending Deals

Upon terminating the employee, the employer proposed paying commissions on the employee’s pending deals provided they closed within five months of his employment termination.  

One pending deal the employee identified (First Pending Deal) was the largest transaction he had ever been involved in, and all of the employee’s work on the deal was completed prior to his job termination.  This deal resulted in the employer being paid over $1.3 million in fees and would have resulted in the employee earning $77,559 in commission.  Because the transaction closed six months following the employee’s termination, the employer took the position that it was not obliged to pay the commission to the employee. 

A second deal the employee was involved in was also pending upon his job termination (Second Pending Deal).  The employee stated that upon this transaction’s closure, he was set to earn between $10,000 to $30,000.  It was unknown when the transaction would close, and it had not yet closed when the motion in this matter was heard.

Employee’s Mitigation Efforts

The employee applied for 70 jobs in a 13-month period that coincided with the economic shutdown that began at the onset of the COVID-19 pandemic. 

Decision

Commission

The court reviewed case law, noting the following governing principles:

  • Unless the contract provides otherwise, there is an implied term in an employment relationship that requires an employer to pay a terminated employee their commission for “sales effected but not yet concluded prior to termination, regardless of when the transaction closes”; and
  • Commissions are earned when a salesperson has substantially performed their duties in relation to the sale, even when the time for paying the commission has not arrived at the time of termination.

In addition, the court referred to the decision of the Supreme Court of Canada (SCC) in Matthews v. Ocean Nutrition Canada Ltd., 2020 SCC 26, which we discussed in detail here, stating that the SCC confirmed that commission that would have become due during the reasonable notice period should be paid in damages to the terminated employee. The court noted that the employer acknowledged, through counsel, that the employee would have had this right. 

Furthermore, the court noted that because commissions are considered “wages” as defined at s. 1(1) of the Employment Standards Act, 2000 (ESA), they must be paid during the statutory notice period, and as provided in Kerner v. Information Builders (Canada) Inc., 2020 ONSC 2975, which we discussed in detail here, any clause in an employment agreement that purports to exclude them during the statutory notice period is void and unenforceable.

The court awarded the employee $77,559 in commission on the First Pending Deal.  It reasoned that because the transaction closed during what should have been the employee’s notice period, commission earned on this transaction is included as part of the employee’s “wages.”

The court did not award the employee commission on the Second Pending Deal “if and when it ever closes” because the employee’s notice period had ended and his entitlement to wages “does not go on forever.”    

Bonus

The court also reviewed case law that provides that when an employee’s bonus is an integral part of their compensation package, unless the parties contract otherwise, the only sensible approach when the notice period ends before the bonus payment date, is for an employee to be paid common law damages as compensation in lieu of a pro rata share of a bonus. 

Noting that the employee’s percentage share of the Bonus Pool would have been paid to him as a matter of course had he continued working during the notice period, the court included it in his pay in lieu of notice and calculated it using the employee’s 2018 and 2019 average Bonus Pool compensation, noting that his last two years of employment were reflective of his experience at the time of termination and therefore reflective of what his compensation would be in his final year. 

Reasonable notice period

The court noted that the plaintiff was dismissed from his employment in the second week of March 2020, days before Ontario declared an emergency.  As a result, the economy was shutting down and remained closed during the employee’s “inevitably prolonged” job search.  While the court expressed agreement with cases that warn against the danger of applying hindsight to the reasonable notice analysis (e.g., Iriotakis v. Penninsula Employment Services Limited, 2021 ONSC 998, which we discussed in detail here), it agreed with courts that viewed the degree of uncertainty caused by the COVID-19 pandemic as one of many factors that should be considered in assessing the reasonable notice period.

The court noted that the reasonable notice period is based on an employee’s age, tenure, character of employment and ability to find similar employment, having regard to the employee’s experience training and qualifications.  It took into account that the employee worked for the employer for 5.5 years, was mid-career, and was a well-qualified salesperson whose job required a specialized knowledge of the investment banking industry.  Noting that the average notice period in reported cases was in the 9-month range, the court decided the employee deserved one month more than average because of the pandemic’s impact on his ability to secure new employment, and set the notice period at 10 months.  Finally, the court awarded the employee the value of the vacation and holiday pay he would have received if he had worked for the 10-month notice period.      

Bottom Line for Employers

This decision recognized that, depending on the evidence presented, the COVID-19 pandemic may prolong the employee’s ability to secure new employment. It is likely that the court in this case was influenced to increase the employee’s reasonable notice period because the employee offered evidence that he had applied for 70 jobs in the 13-month period that coincided with the economic shutdown caused by the COVID-19 pandemic.  Accordingly, employers may be able to argue that an employee’s reasonable notice period should not be increased due to the impact of COVID-19 pandemic in cases where the dismissed employee cannot provide evidence that, despite the pandemic, they made a vigorous but unsuccessful attempt to mitigate their damages. 

Furthermore, Firepower Financial reminds employers that if they want to limit their liability for sales employees’ commissions after the statutory notice period has ended, appropriate contractual language is required that is reasonable and consistent with applicable employment standards legislation.  Accordingly, employers are strongly encouraged to involve experienced employment counsel in the drafting of their employment agreements.    

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