Minimum Standards Monitor
When are Commissions Required to be Paid?
Date: November 24, 2016
Carefully drafted commission plans can limit an employer’s liability for commission payments to terminated or laid-off employees.
Other than a regulation that prescribes set reconciliation periods and minimum wages for commissioned automobile salespeople (see section 28 of O. Reg. 285/01), the Employment Standards Act, 2000 (Act) says very little about commissions. The Act does treat commissions as wages and the general rules regarding wages also apply to commissions. However, there is some flexibility for employers outside of the automobile sales sector to decide how and when commissions will be paid.
What Rules under the Act Apply to Commissions?
Section 11(1) of the Act requires employers to “pay all wages earned during each pay period.” Commissions are wages and therefore are required to be paid on each pay period. However, commissions can be complicated, especially where there is a delay between the transaction giving rise to the commission and when the employer receives payment on the transaction. In addition, even where an employer may receive payment for the transaction, there may be other events that need to be taken into account, such as returns or post-payment rebates due to defects. If an employer pays a commission and subsequently is not paid by the customer, it is difficult for the employer to recover the commission from the employee. Section 13 of the Act prohibits employers from withholding or making deductions from an employee’s pay without written authorization.
How then, does an employer comply with the obligation under section 11 and avoid needing to subsequently claw back overpayments? The key is not to pay any commission until the employer has been paid.
The Act requires employers to pay wages (e.g. commissions) when they are “earned”. As commission plans are designed by employers, it follows that the employer decides when a commission is “earned” by the employee. A recent case has confirmed that employers have considerable discretion in designing commission plans and defining when a commission is earned. That discretion extends to excluding payment where an employee is no longer actively employed at the point where the commission is considered to be “earned”.
Bakshi v. Global Credit Collection
In Bakshi v. Global Credit Collection, Justice Belobaba of the Ontario Superior Court upheld the non-payment of commissions after lay-off on transactions that occurred prior to the lay-off.
The case involved a debt collection agency. Employees of Global Credit Collection were eligible for commission based on the amounts successfully collected on behalf of creditor clients. One strategy employed by the collectors was to convince the debtors to provide a series of post-dated cheques to pay off their outstanding debts. Commissions were paid based on these cheques being successfully cashed.
Global Credit’s main customer was Capital One. Capital One terminated its contract with Global Credit which triggered an obligation by Global Credit to turn over to Capital One all of the post-dated cheques collected from Capital One’s debtors. As Capital One was Global Credit’s largest client, the termination of the contract meant that Global Credit had to immediately lay-off over 300 employees. Eventually Global Credit recalled almost all of the laid-off employees. In the meantime, Global Credit also negotiated a settlement with Capital One for $5.7 million “to resolve any and all existing and potential disputes between them … including any claims for disparagement, unlawful competition, defamation, libel and/or slander.”
After this settlement was reached, the employees of Global Credit commenced a class action law suit asserting that they were entitled to 15% of the settlement. They asserted that the settlement was paid by Capital One to Global Credit to compensate for the post-dated cheques that were turned over to Capital One when the contract was terminated and that they were entitled to receive commissions on the value of the post-dated cheques.
In order to decide the case, Justice Belobaba had to piece together the terms of the commission plan that applied to employees of Global One.
The Global Credit Commission Plan. Justice Belobaba found that the applicable commission plan for Global Credit’s employees had the following terms:
- commissions are only paid when Global is paid
- commissions are only paid when a pre-assigned “breakeven” is exceeded (i.e. the collector must successfully collect a minimum monthly amount before any commissions are payable)
- post-dated cheques that were successfully cashed each month contribute to the employees “breakeven” for the month in which they were cashed
- the “breakeven” changes monthly at the discretion of the employer based on factors such as the nature of the account being worked, changing currency rates or economic conditions and changing internal financial realities
- commissions could be reduced or eliminated entirely at the discretion of management
- post-dated cheques that are still in the “queue” were only credited to the original debt collector if they were still working on the account at the time the cheque is cashed
- employees could be reassigned to different accounts at the discretion of management.
Based on the above terms, Justice Belobaba found that the laid-off employees were not entitled to commissions on post-dated cheques that were received after they were laid-off and were not achieving their “breakeven”. In other words, no commissions were “earned” under the commission plan.
Justice Belobaba also went on to find that the settlement payment was not on account of the post-dated cheques in any event. As such, the class action law suit was dismissed.
The Bakshi case is a good reminder for employers of the importance of properly drafting commission plans. In defining when commissions are earned it is a good idea to consider the effect of changes in circumstances including lay-offs, termination of employment, leaves of absence or reassignments to new accounts and how those events will affect an employee’s entitlement to commission. The most important principle to keep in mind is that employees only “earn” commissions once the employer has been paid by the customer.
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