Severance for Salespeople: What Employers are Doing
Like all other employees, those working in sales whose employment is terminated without cause are entitled to be paid severance. However, it has become an increasing practice in today’s economy for employers to classify their salespeople as “independent contractors”, and then pay these salespeople through separate corporations without making the statutory withholding required for employees, and instead adding HST. By doing this alone, employers believe that they can avoid paying these salespeople their severance when their employment is terminated. This is nonsense.
While a truly independent contractor would not be owed severance, legally speaking the vast majority of salespeople are employees, not independent contractors. In situations where a salesperson has to devote their full time and effort to their employer, to the exclusion of any other employer, and receives compensation from that one company only, those salespeople are almost always employees in the eyes of the law.
This is even more the case if those employees have their hours set by the employer, work in the employer’s office, are paid a base salary in addition to commissions, or if they do not control the pricing of the products that they sell. These salespeople will likely be found to be employees even if there is a contract stating that the salesperson will be designated as an “independent contractor”, and even if that salesperson’s tax returns show them as being incorporated into a business on his or her own behalf. As employees, these salespeople must receive their full severance.
For example, in Huber v Way, 2014 ONSC 4426, a condominium salesperson who rendered invoices to various projects and was paid through his corporation was found to be an employee because, among other things, the salesperson worked fulltime for the company, used the company’s staff and supplies, was required to follow the company’s direction.
What about those situations when it is not as clear? For instance, there may be some salespeople who sell products for multiple employers and set their own hours, but are still largely dependent on one employer for income. As discussed in an earlier tele-seminar and blog post, these salespeople may have the status of a “dependent contractor.” Dependent contractors are entitled to severance just as employees are. A number of factors are considered in deciding whether someone is a “dependent” contractor, including:
- Duration permanency of the relationship: The longer the duration of the relationship, the more likely that the salesperson will be found to be a dependent contractor.
- Degree of reliance/closeness of the relationship: Where a sales representative works for multiple employers, but relies on one employer for 90% of his/her income, that sales representative will likely be found to be a dependent contractor with respect to the employer upon which the sales representative is most reliant on.
Once a salesperson has been determined to be an employee or a dependent contractor, the next question becomes how much are they owed. As we have discussed in earlier posts, there are a number of factors that go into the calculation of an employee’s severance – primarily the employee’s length of employment, as well as their age, their position, and the availability of comparable employment. Once these factors are considered, the amount of severance that a salesperson is owed will then be calculated on a monthly basis.
For example, a 55 year old salesperson who worked for a company for 15 years could be owed as much as 16 months’ of their pay. The question is, what does 16 months of pay mean when an employee is paid by way of not only salary, but commissions and bonus as well?
Here, the important thing to remember is that severance is designed to give employees everything that they would have received had the employer given working notice. For salespeople, if they are given working notice, they would still be entitled to make sales and earn all of their commissions throughout the working notice period, and if they were entitled to receive a bonus at that time, they would receive that bonus as well.
For that reason, any severance package for a salesperson must take into account not only their base salary, but a projection of what their commissions and bonus would have been had they been given working notice.
Takeaways for Employers and Employees
- Never assume that a salesperson is an “independent contractor” just because they are paid through a corporation or there is a contract designating them as independent; and
- Be aware that any severance paid to a sales representative should take into account their full compensation, and not just their base salary. This would be best discussed with an employment lawyer
Jon Pinkus is an associate lawyer with Samfiru Tumarkin’s Employment and Labour Law Group in Toronto, Ontario.