Termination Pay Pitfalls: What About Commission and Bonuses?
For non-salaried employees and their employers, termination entitlement can be a complicated matter. Sometimes employees’ entire pay structures are centered on bonuses and commissions. Upon termination, employees are often left wondering how much they are owed if they receive very little in the way of a base salary. Employers worry about short-changing their employees. Under the Employment Standards Act, 2000, employers are required to look at the amount of money the employees make, rather than how it is characterized, for the purposes of determining entitlement.
Employers are required, at a bare minimum, to pay Employment Standards Act, 2000 termination pay to employees upon termination (unless they are dismissed for willful misconduct). This amounts to one week’s pay in lieu of notice per year of service, up to a maximum of eight weeks. During that period, health and other benefits must be maintained. The wages paid during this time must be equivalent to wages paid during a regular work week.
Oftentimes, employers run into problems when calculating the termination pay for employees who are paid either entirely or partially based on commissions and bonuses. In other words, these employees do not have “regular work weeks”: they are not paid on the basis of an hourly wage or salary. How must employers determine how much they are entitled to?
The Employment Standards Act, 2000 states:
No regular work week
[…] if the employee does not have a regular work week or if the employee is paid on a basis other than time, the employer shall pay the employee an amount equal to the average amount of regular wages earned by the employee per week for the weeks in which the employee worked in the period of 12 weeks immediately preceding the day on which notice was given.
In such a scenario, the employer must average the employee’s pay over the previous 12 weeks (base salary, commissions, bonuses, and other payments) to determine the weekly amount. Termination pay amounts must be carefully reviewed, as the employer may not have calculated the amount properly. In a situation where an employee received a significant commission during right before termination, these payments can be substantial. A properly worded termination clause inserted into an employment contract can limit an employer’s liability on termination.
If you have questions about termination pay, please contact our employment group.