For commissioned salespeople, there's a huge range of options in terms of structuring a compensation package. For a salesperson taking a new job where 100% of the compensation package is commission, there's huge risk, but that risk is sometimes abated by 'advances' against commission: The notion is typically a recognition that it takes some time for a salesperson to get going, and so needs a bit of money to pay the bills until the commissions start rolling in. Once the commissions start coming in, they are first applied against the advanced money.
But what happens if the salesperson never makes enough commissions to offset the advanced money? Is the employer entitled to have it repaid?
The answer depends on the terms of the contract, as Eco-Shift Power Corporation recently discovered the hard way.
Gord Butler started working for Eco-Shift in January 2012. He had 20 years' sales experience, but was unfamiliar with Eco-Shift's specific industry.
Mr. Butler was an independent contractor, not an employee. (I'm not entirely sure that this finding considered all the requisite factors, but it's of relatively marginal importance to the case.)
The contract between the parties is referred to as the "MRA" (Manufacturer Representative Agreement), for a one-year term, which Eco-Shift enters into with all its salespeople. However, there was a 'side deal' not integrated into the MRA involving 'advances' of $2500 bi-weekly.
By November 2012, Eco-Shift was becoming concerned by Butler's performance; his advances to date were far in excess of his earned commissions. Accordingly, they told him that the advances would be discontinued. (They wanted him to keep working to pay off the advances, but it's hard to imagine that happening under those circumstances.) Butler quit in response to the termination of advances. Eco-Shift sued in Small Claims Court to recover the outstanding advances.
What were the contractual terms relating to advances?
The exact terms of the advance deal are the crux of this case. While Eco-Shift understood the term "advance" to mean "interest-free loan" (which is certainly a reasonable interpretation), there is no reason to think that Butler shared that understanding; none of the documents actually referred to the advances as a loan, nor was any end date for provision of advances provided. The agreement itself contemplated that commissions would be applied to the advances, but didn't go beyond that to state that Eco-Shift could otherwise recover the advance monies, or that they constituted a debt to Eco-Shift.
Accordingly, Eco-Shift's claim against Butler was dismissed.
What could Eco-Shift have done differently?
There have been cases where advances were found to be recoverable debts, but it turns on the wording of the agreement.
In other words, a relatively simple rider in the contract, requiring repayment of outstanding advances at the end of the relationship, would have done the trick.
Yet another reason why it's important to have a lawyer look at your contracts. It certainly makes sense to think that an 'advance' would generate a debt, but it's important to be express, especially where employer remedies are concerned.
This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.
The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation. If you need legal assistance, please contact him for information on available services and billing.