Articles

No Longer Commission Impossible?

Bonus and Commission Claims Get Boost from Court Decisions

V. John Ella
(jella@mansfieldtanick.com)
Mansfield, Tanick & Cohen, P.A.
1700 U. S. Bank Plaza South
Minneapolis, MN 55402
Tel: 800-401-6194
FAX: 612.339.3161

For Minnesota employees 2004 was a banner year for legal claims to recover unpaid bonuses and commissions. Three decisions[i] by Minnesota appellate courts, all issued in the latter half of 2004, tipped the scales of justice in the direction of employees on theories of breach of contract, unjust enrichment and violation of state wage statutes. Employers should take heed from these decisions and tighten the definitions in their written commission policies. Employees should be heartened, but still wary.

Hundreds of thousands of employees in Minnesota and elsewhere are compensated based on a commission or bonus structure in place of, or in addition to, a straight salary. These employees include real estate agents, commissioned sales people, and anyone else with an incentive bonus as a component of their wages. These types of plans make good sense – they provide a direct incentive for the employee to accomplish his or her goals and only cost the employer if the employer gets paid. The New York Times estimates that in big companies upper managers generally receive 15 to 25% of their total pay in bonuses, and indicates that for the 2004 bonus season companies allocated 10% of their entire payroll to pay-for-performance bonuses, up from 8.8% in 2003. [ii]

Often, however, a dispute arises as to whether a commission is due, or how much should be paid. (And, in some cases employers fire employees in order to avoid paying bonuses, although so-called “bad faith” claims by employees have not faired well in Minnesota.[iii]) Courts traditionally approach bonus disputes based upon a traditional breach of contract analysis. Recent appellate decisions, however, suggest that there may be other potential remedies for employees in these circumstances. One is found in the law of equity and provides for a claim of “unjust enrichment” even in the absence of a provable breach of contract claim. The other remedy is a new application of the protection for employees found in Chapter 181 of Minnesota statues.

Minnesota attorneys have long relied upon Minn. Stat. Section 181.13 in bringing wage claims because it allows for the recovery of attorney’s fees and a penalty of 15 day’s pay if an employer refuses to pay wages in a timely fashion. [iv] This law, like its counterparts in other states, was designed to protect the common laborer and to provide an disincentive for employers to stiff their workers. The statute also refers specifically to “commissions,” and can be applied to a claim for a six figure annual bonus for a bank executive just as much as it protects a day laborer. A companion statute, 181.45, applies only to independent contractors and also provides for attorney’s fees and a penalty of double damages, but is not available to employees. In Wages v. Northern Life Chiropractic, Inc., the plaintiff (either creatively or inadvertently) asserted a claim under Minn. Stat. 181.03, a relatively obscure provision that provides for “double” damages where the employer alters the “method or timing” of a payment of a bonus or commission. Double damages usually equates to more than 15 day’s pay. In Wages, the Minnesota Court of Appeals affirmed a trial court award for unpaid commissions, double damages, and attorney’s fees under Minn. Stat. § 181.03. It remains to be seen whether other courts will apply the law as broadly. In Wages, the eponymic plaintiff, Mr. Wages, operated under a 45% commission schedule and performed chiropractic work for patients who had not yet paid their bills at the time he left employment. The employer argued that Mr. Wages did not “earn” his commission until the money was received by the Defendant. The Court of Appeals “disagree[ed].” The timing of the payment of a commission, it noted, “does not determine when it was earned.” The appellate court upheld the trial court’s finding that the “commissions were earned when the services were provided” even though “during his employment respondent was never paid until after NLC had been paid by a patient.”

The second significant appellate decision on commission claims last year was in Galbraith v. U.S. Premise Networking Services, Inc. In that case, as in Wages, the Minnesota Court of Appeals found that the commission was earned at the time of the sale and merely payable at the time of payment by the underlying client. [v] The court reiterated the law that an employer is obligated to pay commissions for which the salesperson has been the “procuring cause.” According to the court in Galbraith, an employer is liable for payment of commissions for all work “contracted,” whether or not it had been “invoiced.” In that case, the commission was found to be “earned at the time of sale and payable after the company received the money” despite the lack in the decision of any mention of any written contractual language to that effect. [vi]

Galbraith highlights the important distinction between “earned” and “payable.” The employer in Galbraith argued that the claim for commissions earned on accounts receivable, accounts contracted but not invoiced, and proposed contracts not yet contracted, were “based on hearsay, speculation, guess” and that appellant did not produce any third-party evidence, depositions or customer evidence. The Courts dismissed its arguments and upheld the damage award. The Galbraith decision also highlights the difference between a terminated employee and one who is involuntarily prevented from waiting for all of her booked sales to be paid by the customer, and a salesperson employee who quits or leaves voluntarily. The court explained this policy as follows:

The district court, in addressing the motion for JNOV, stated that Minnesota courts have held that “when a commissioned salesperson has been the procuring cause of a sale, the employer cannot avoid paying commission that was earned by opportunistically terminating the employee or preventing the employee from doing whatever else might be required to perfect his or her right to the commission.” See, e.g., Gunderson v. N. Am. Life & Cas. Co., 248 Minn. 114, 119-20, 78 N.W.2d 328, 332 (1956. That is still good law. [vii]

Finally, the court in Gailbraith also upheld recovery of a significant amount, over $100,000, in attorney’s fees for the employees under Minn. Stat. §181.13(a).

The third notable decision in 2003 came from the Minnesota Supreme Court in Rosenberg v. Heritage Renovations, LLC, in which the state’s highest court held that a real estate broker’s commission is earned when a person has performed all that he undertook to perform. [viii] That Court confirmed that, unless a broker and his employer have expressly stipulated to the contrary, a broker is entitled to his compensation upon the completion of the negotiations which he undertook. [ix] This duty to compensate is not dependant on whether or not the contract negotiated is actually consummated or whether the failure to complete the contract is due to the default or refusal of the employer or to that of the party procured by the broker. The Rosenberg case primarily concerned the application of a specific statute governing recovery of commissions for real estate brokers, but in analyzing the issue the Court applied principles of “equity” and indicated that a claim would also lie under the theory of quantum meruit or unjust enrichment, noting that courts have an unabrogated equitable authority to use the procuring cause remedy where necessary to do complete equity. [x]

The ability of a commissioned employee or independent contractor to recover under a theory of unjust enrichment for work actually performed was also upheld by the Minnesota Court of Appeals in a 2003 decision entitled Evenson v. Hanson. [xi] In that case the court held that employees must be paid the fair and reasonable value of the labor and skill performed. [xii] When an employer does not pay a commission, it noted, the employer receives a benefit (equal to the amount of the commission payable to the employee) that it is not entitled to, since the employee is entitled to it by virtue of his or her work. Id. “[I]t would be unjust,” to allow the employer to “retain [the employee’s] portion of the overall commission.” Id. In addition to breach of contract, therefore, Evenson and Rosenberg set forth a possible alternative basis for relief for aggrieved plaintiffs in this area.

CONCLUSION

The most important thing to keep in mind when drafting or agreeing to a commission or bonus plan is to have the terms specifically set forth in writing. Employers should unambiguously and specifically state in the written policy that commissions are not deemed “earned” until the sale is made and the money is paid by the underlying customer or client and received by the Employer, especially where there is significant delay between the sales and payment. Otherwise employees may be able to claim the right to bonuses for pending sales and sales in the “pipeline” at the time they are fired. Employers should also unambiguously and specifically state that the right to future commissions or bonuses ceases immediately upon termination of employment for any reason, especially where employees otherwise have the right to a commission on repeated or future sales from “their” designated customers or accounts. Otherwise terminated employees might argue that they have a right to lifetime residuals.

Employees starting out under a commission structure should strive to make sure that they are receiving specific, periodic (i.e. monthly) written updates as to what their sales numbers are, a listing of which accounts or customers are considered “theirs,” and whatever else is relevant to their bonus or commission compensation. Employees often run into trouble when they rely on verbal assurances from a new employer that everything is fine, and then have no paperwork to support their claim.

Mr. Ella is an attorney at Mansfield Tanick & Cohen, P.A. and regularly handles bonus and commission disputes in state and federal court for employers and employees.