Severance and commissions: how unclear contracts create litigation risks

“This is kind of a textbook case on how everything goes wrong if you don't put the thought and preparation into your practices and policies from a human resources perspective,” he says. 

“The written documentation should be very clear, especially for larger employers. You don't want to have ambiguity or any doubts about what an employee is entitled to at termination. That always works against you as the employer.” 

Commissions and termination: how the courts calculate compensation 

One of the most crucial takeaways from the Thompson decision is how courts assess compensation for employees who earn commission. Revolution argued that Thompson was not entitled to commission income after termination, but the judge disagreed. 

"The judge quite rightly looked at the history of commissions and used the history of the commissions as the basis for determining how much commission income she would have received had notice been given,” says Overholt, pointing to a “Commission Clause” in its policies which Revolution used as the basis for its argument.  

The clause outlined that employees must be “active and current” in order to receive any commissions or bonuses. It also stated: “Any employee that has been terminated, laid off, resigned, on leave, or disability at the time commission is due will not be eligible.” 

Employers can largely avoid this type of litigation by having clear, legally sound commission policies; the problem for Revolution, Overholt explains, was that their contract lacked clarity. 

“If there was a proper written employment contract with a proper policy dealing with the commissions, this could have been avoided for the employer,” says Overholt.  

“It could have been entirely avoided, because the employer could say, in a contract … ‘We can pay you the equivalent of three or four months of salary, but you will not be entitled to anything for the loss of commission income.’ Now that would have addressed this problem for the employer.” 

This is a critical point for employers – severance is not just about salary, and employers must be careful with contract wording as courts will interpret ambiguous contract terms against the maker of the contract: the employer. 

“The problem with that language is … it doesn't take into account: ‘Well, what happens if they're wrongfully terminated?’” Overholt says, explaining that to address this, courts have decided to read such clauses as applying only to employees who are lawfully terminated.  

Termination and employee circumstances:  personal factors 

A significant factor in the court’s consideration included the personal circumstances the employee was dealing with at the time of termination – in the months prior, her mother had become severely ill, requiring the employee to be absent from work while she dealt with her care, which was a temporary situation.  

This coincided with the employer’s push for higher production levels, which had caused some friction. 

“I would say that what went wrong here was [the employer’s] overall approach to problem solving,” says Overholt.  

“Insisting on higher production knowing that you've got an employee with a personal crisis, an important family crisis … I think HR has a very important role to understand that and come up with ways to solve that problem." 

Handling terminations with care is part of a well-managed HR strategy, Overholt stresses. Rather than rigidly demanding performance in difficult personal situations, employers should consider alternatives to termination. 

“You might proceed with an unpaid medical leave, or compassionate leave, to allow the employee to get care in place for a loved one and then return to their duties,” he says. 

“There's some right to insist on good performance, but you also have to take into account the human element, the fact that there were personal circumstances that were outside of her control, and she was conflicted, and there is a duty to inquire. So, I do think that the decision was very well reasoned.” 

Punitive damages and the cost of a hardline approach 

The court awarded Thompson $25,000 in punitive damages, recognizing that Revolution took an unnecessarily hard-nosed approach to defending the case. However, Overholt points out that it could have been much worse – another reason for employers to take note of this decision.  

Aggressive defense strategies may have worked in the past, he explains, but warns that this is no longer the case. 

“There are lots of very capable plaintiff’s counsel out there, just waiting for an employer to trip up,” Overholt says. 

“Maybe 10 years ago, or 20 years ago, that strategy may have worked in some circumstances, but I don't think it's a winning strategy now, as Revolution Resource Recovery found out.” 

Clear documentation prevents legal risks 

The main takeaway for employers in this case, says Overholt, is that unclear employment contracts are risky business.  

“It gives the plaintiffs’ counsel leverage to say, ‘Well, your documentation just doesn't hold up, and so the common law applies,’” he says. “And the common law, it's generous to employees. So I think that really the heart of this is the inadequacy of written contracts and written policies.” 

Key takeaways for employers: 

1. Clearly define severance entitlements in employment contracts, including whether commissions will be included. 

2. Ensure contract wording is unambiguous, as any uncertainty will be held against the employer. 

3. Consider personal circumstances before terminating an employee and consider if alternative arrangements are preferable. 

4. Avoid aggressive legal strategies – courts do not look favourably on such approaches. 

5. Seek legal advice.