Variable Pay and Termination - To Pay or Not to Pay?

*Written by Hannah Goranson

Employee compensation can take many different forms. While many employees earn a base salary, many employees also receive various other benefits and perks. For example, an employee may be paid commission, participate in their employer's group benefit plan, earn bonuses or other incentive pay, receive stocks options, and many other forms of perks. Commonly referred to as "variable pay", these benefits and perks often form an integral part of an employee's total compensation package.

It is common practice for employers to attempt to contractually limit employees' entitlements to variable pay following termination. Specifically, employment agreements often include provisions that state that the employee has no entitlement to variable pay following termination or during the termination notice period.

Given that variable pay can form a significant portion of an employee's compensation package, such provisions have become the subject of much judicial attention. In two recent decisions, the Ontario courts shed light on when, and how, an employer can contractually limit an employee's entitlement to variable pay following termination.

(1)O'Reilly v. IMAX Corporation, 2019 ONCA 991 ("O'Reilly v. IMAX")

In O'Reilly v. IMAX, the Ontario Court of Appeal considered the employee's entitlement to damages in lieu of variable pay during the common law reasonable notice period following termination.

The employee participated in a Long-Term Incentive Plan (LTIP) that granted the employee various awards, including stock options and Restricted Share Units. The LTIP included a provision that stipulated that the employee's unvested awards would be automatically cancelled "as of the date of the termination".

The employee was terminated, and the employer immediately cancelled his unvested awards. The employee brought a wrongful dismissal action, claiming, amongst other things, that he should have received compensation for the awards that would have vested during the common law reasonable notice period.

The Court of Appeal ruled in favour of the employee.

In reaching its decision, the Court of Appeal outlined the appropriate framework for determining whether an employee is entitled to receive variable pay during the common law reasonable notice period is a two-step analysis:

1. Determine whether the employee had a common law right to the variable pay, based on what they would have been entitled to if the employee been provided with working notice of termination; and
2. If the employee is entitled to the variable pay, determine "whether the terms of the relevant contract or plan unambiguously alter or remove the employee's common law rights, having regard to the presumption that the parties intended to apply the law, in the absence of clear language to the contrary."

Applying this analysis, the Court of Appeal held that the provision did not unambiguously remove the employee's common law right to the awards. "As of the date of termination" could be interpreted as meaning the end of the reasonable notice period. The employee was therefore entitled to compensation in lieu of the awards that would have vested during the reasonable notice period.

In other words, wording and language was key in this employee's success.

(2)Kerner v. Information Builder Canada Inc., 2020 ONSC 2975 ("Kerner v. Information Builder Canada Inc.")

In Kerner v. Information Builder Canada Inc., the Ontario Superior Court of Justice contemplated whether a wrongfully dismissed employee was entitled to damages in lieu of commission during the reasonable notice period. The employer relied on provisions contained in two of its Sales Plans to argue that the employee had no entitlement to commission following his termination.

The 2017 Sales Plan stated:

"In order to be entitled to receive commission you must be employed by IB at the time the sale has been booked and billed."

The 2018 Sales Plan stated:

"Commissions are not payable in respect of any period of notice, whether, contractual, statutory, or based upon the common law, following termination of your employment for any reason whatsoever, unless the sale transaction was booked and billed prior to the date of termination of your employment. The date of termination is the date on which your active employment with Information Builder ceases and you are no longer providing services to the company."

The Court held the employer could not rely on either provision. The employee was entitled to commission during the reasonable notice period. Applying the analysis from O'Reilly v. IMAX, the Court held that 2017 Sales Plan did not unambiguously remove the employee's right to be paid commission during the notice period. "Employed by IB" should be interpreted to include the full length of the notice period following termination.

The Court held the 2018 Sales Plan was not enforceable as the employee had not been provided with any new consideration at the time of the 2018 Sales Plan coming into force.

Notably, the Court also concluded that the provision in the 2018 Sales Plan would not be enforceable in any event as it potentially breached the minimum termination entitlements set out in the Ontario Employment Standards Act (the "ESA"). The ESA entitles employees to a minimum statutory notice period, during which they are entitled to receive their full wages, including commission. Thus, by limiting the employee's entitlement to commission during the statutory notice period, the provision violated the ESA.

This decision serves as an important reminder that the common law notice period and statutory notice period are treated differently by the Courts. While it is perfectly acceptable for an employer to contractually limit employees' entitlements during the more generous common law reasonable notice period, the same cannot be said for the statutory notice period. Generally, an employer must provide employees with their full compensation package during the statutory notice period, including commission and benefits.

Key Takeaways:

A number of important takeaways can be gleaned from theses decisions:

1. Employees are generally entitled to variable pay during the reasonable notice period.
2. Employers can contractually limit an employee's entitlement to variable pay during the common law notice period, but the contract must expressly and unequivocally exclude the employee's entitlement. Only the clearest of language will be sufficient.
3. Commission is included in the definition of the wages under the ESA. Any provision that attempts to exclude commission during the statutory notice period will be void and unenforceable for violating the ESA. Likewise, the ESA requires employers to continue benefit contributions during the statutory notice period.

When dealing with terminations, employers and employees alike are encouraged to seek legal assistance. Lee Workplace Law would be happy to help.