Ambiguous Clause in Commission Policy

Written by Lewis Waring, Paralegal, Editor, First Reference Inc.

O’Reilly v IMAX Corporation, 2019 ONCA 991, the Court of Appeal for Ontario (“ONCA”) awarded a former president of IMAX two years of severance after the court agreed with the Ontario Superior Court of Justice’s ruling that he had been wrongfully dismissed. The employee in this case was 53 years old at the time of the decision. He had worked for IMAX Corporation for 22 years, finishing his tenure as President, Institutional and Strategic Sales. His compensation package at the time of his dismissal included a salary of $335,000, commissions and bonuses, Restricted Stock Units, stock options, benefits and participation in the employer’s pension plan.

Mr. O’Reilly had requested 30 months of pay in damages from his employer, taking into account all elements of his compensation package. An employee’s request for 30 months of pay in damages would commonly be referred to in a court room as “30 months of pay in lieu of reasonable notice.”

Pay in lieu of reasonable notice

Pay in lieu of reasonable notice at common law is an extremely common concept in employment law but a confusing term to anyone not a legal professional. This concept refers to the way in which judges calculate the amount of notice an employer must give an employee. If it has been established that an employee has been wrongfully dismissed or constructively dismissed by an Ontario judge, the judge will determine how much notice the employee is entitled to receive.

Outside of court, the amount of notice required is set out in a statute called the Employment Standards Act, 2000. However, once a matter ends up in court, the amount of notice an employee is entitled to is determined not by statute but by the common law, which is a collection of court decisions which are binding on the court. The general principle which guides the decision as to how much notice an employee is entitled to is that employees are entitled to an amount of notice that is reasonable. The term which results out of this idea is “reasonable notice at common law.”

In Ontario, an employer is allowed to substitute a sum of money for reasonable notice. Thus, if an employee is entitled to one month of reasonable notice at common law, an employer may substitute that month of notice with an amount of money equivalent to that which the employee would have earned throughout that period of reasonable notice.

Mr. O’Reilly’s “pay in lieu”

As stated, Mr. O’Reilly had requested 30 months of pay in lieu of reasonable notice from the ONCA. The ONCA eventually awarded him 24 months of pay in lieu of reasonable notice. Although this was less than he had requested, it was a substantial sum of “pay in lieu” for any Ontario employee. In fact, it is said that 24 months is a “rule-of-thumb” maximum amount of notice which an employee can win in an Ontario court.

Furthermore, 24 months of “pay in lieu” was a good amount for Mr. O’Reilly because that award was two months more of common law reasonable notice than courts “typically” award employees who have 22 years of service. In other words, Ontario courts generally limit their awards of pay in lieu of reasonable notice to one month of compensation per year of employment. In O’Reilly v IMAX Corporation, the ONCA thus decided that Mr. O’Reilly was entitled to receive a bit more than was typically awarded in wrongful dismissal cases.

Ambiguity in Mr. O’Reilly’s commission policy

One of the more contentious issues in O’Reilly v IMAX Corporation concerned the legality of a certain clause in his employment contract. The employment contract in this case included a policy regarding commissions which stated that, upon dismissal, unpaid commissions would be reduced by 50 percent. Specifically, the policy stated that “Employees are eligible to receive 50% of their ongoing commissions at the time that they terminate employment…” The court saw that the meaning of the word “they” in that sentence referred to employees and not to employers.

The ONCA found that the policy was drafted such that it seemed to apply to situations in which an employee terminated employment and not when an employer terminated employment. In other words, the reduction in commissions was only applicable when an employee resigned and not when they were dismissed. Thus, the employer’s attempt to apply the policy to their dismissal of the employee, in this case, left the policy’s meaning ambiguous. Following a principle set out in a prior case law such as Wood v Fred Deeley Imports Ltd, 2017 ONCA 158, the court interpreted the ambiguous policy in favour of the employee.

Accordingly, the court calculated the employee’s commission payments based upon those earned during his last year of employment, declining to use the common method of taking a three-year average due to diminished amounts earned in his final years of employment. The senior executive employee had worked for his employer for approximately 22 years, from March 1994 until his dismissal on January 4, 2016.

Takeaways

First, Ontario employers can see from O’Reilly v IMAX Corporation that the “one month per year” rule is more of a rule of thumb and is flexible when the courts wish it to be. In this case, the employee had worked for his employer for 22 years but received 24 months in pay in lieu of reasonable notice. This award shows that while Ontario courts likely won’t award a significant amount in excess of a month per year of employment, they certainly may award a few months over or under that standard in any given case. The takeaway for Ontario employers is that calculating reasonable notice is a flexible process in which the “rules” are more like guideposts than firm standards.

Second, it is worth noting that it is a typical strategy for employees to inflate the amount of notice they request from a court when asking for pay in lieu of reasonable notice. Receiving 24 months after requesting 30 months was likely viewed by the employee’s legal team as a victory and perhaps even as good as it could have gotten for Mr. O’Reilly. The takeaway for Ontario employers is thus that the amount an employee may argue that he or she is entitled to is more of a “high water mark” than a black-and-white demand. The process of determining how much reasonable notice an employee will ultimately receive is, in this sense, not so different from a bargaining process.

Third, O’Reilly v IMAX Corporation demonstrates a clear example of the principle that ambiguities in employment contracts are to be interpreted in favour of the employee. In this case, the employer very well likely intended to limit the commission amounts an employee could collect after he or she had been dismissed. However, the employer failed to translate their intention into a clear provision in the employment contract which bound them to the employee. A failure to clearly lay out intentions in a contract can easily come back to bite employers once they end up in court. As stated, the courts, as a rule, always interpret ambiguities in the favour of employees. The takeaway for Ontario employers is to ensure that their intentions are clearly laid out in employment contracts which they bind themselves to. This case demonstrates again how easily one word can unwind an entire provision and ultimately make a difference of thousands of dollars.

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