The best way to reduce litigation risk in relation to an employee termination is to agree in advance how much notice of termination (or pay in lieu of notice) an employee is entitled to receive.
Employers rarely provide ANY notice of termination so the employee’s employment contract should have a termination clause setting out how termination pay is calculated.
Kraft v. Firepower Financial Corp., 2021 ONSC 4962 (CanLII): A Case Study
Mr. Kraft, a commissioned salesperson, was terminated without notice after 5.5 years service. He earned a salary of $ 70000 and was eligible for commissions and a bonus. The parties had not agreed on his rights on termination, so he was entitled to common law reasonable notice of termination.
The employer basically took the position the notice period was 5 months. As a result, Mr. Kraft was not entitled to about a $ 75000 commission on a sale that closed 6 months after his termination. He completed all sales activities in connection with this sale prior to his termination.
Mr. Kraft took the position that he was entitled to 10 months pay in lieu of notice, which included 10 months salary, the $ 75000 commission and a bonus during the 10 month period.
I suspect this case was litigated over Mr. Kraft’s entitlement to the $ 75000 commission.
The judge stated that the notice period in similar reported cases was 4 to 12 months with an average of 9 months. The judge decided to add a month to this “average” notice period, for a notice period of 10 months because Mr. Kraft had a harder time finding work as he was terminated at the beginning of the COVID pandemic (i.e. March 2020).
By contract, this employer could have limited Mr. Kraft’s termination pay to his minimum entitlement under the Employment Standards Act. Assuming the employer’s payroll was under $ 2.5 M, then the contract could have limited him to 5 weeks termination pay or about $ 6730 plus any commissions and bonus he was eligible to earn during this 5 week period.
The judge ordered the employer to pay 10 months salary or about $ 58000 plus over $ 75000 commission, plus a 10 month prorated bonus based on his last 2 years bonus. In addition the employer was required to pay its own legal costs and will likely be ordered to pay 60% to 90% of Mr. Kraft’s costs .
Lessons to Be Learned
- Employers should make sure that all employees sign an employment contract with an enforceable termination clause.
- If an employer does not want to pay an employee commissions or a bonus unless the person is actively employed, then the policy and the termination clause generally needs to explicitly and clearly and unambiguously say so subject to the employer’s obligations to pay commissions and/or a bonus under any applicable employment standards law.
- It is extremely difficult to predict reasonable notice periods especially for employees who were terminated after the pandemic started. In this case, the judge stated “ For employees of his age, experience, and time on the job, the case law varies between 4 and 12 and months as a reasonable notice period. Scanning the relevant case law, the average notice period in the reported cases is in the range of 9 months:…there is evidence that the pandemic impacted on the Plaintiff’s ability to secure new employment. In light of that evidence, he deserves to receive at least somewhat above the average notice period. I would peg the figure at 10 months, or one month more than the average for his circumstances during non-pandemic times.”
For over 30 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him directly at 416-317-9894 or at [email protected]