A recent California appeals court decision highlights the importance of carefully drafted commission pay agreements.
Los Angeles-based web hosting company Hostpro, Inc. hired Randy Nein as a sales representative. At the time of his hire, Nein signed a commission pay agreement. Among other things, the commission pay agreement stated that Nein was “eligible for commission pay as set forth in this [agreement], so long as [Nein] remains employed with the Company as a Sales Representative.”
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Not long after being hired, Nein began negotiating with communications giant AT&T for Hostpro to take over providing web hosting services for some of AT&T’s small and mid-sized business clients. Two years later, higher-ups at Hostpro finalized an agreement with AT&T to take over that work. However, a little over month before the deal was done, Hostpro terminated Nein.
Nein sued, arguing that he was entitled to a commission on the AT&T transaction because he’d initiated the negotiations with AT&T, and remained involved in the activities leading up to the deal. The court disagreed, finding that Nein’s commission pay agreement with Hostpro clearly stated that he was only eligible to receive commission pay while he was employed by Hostpro, and that the agreement ruled out the possibility of post-termination commission payouts.
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The key to Hostpro’s win in this case was a carefully and clearly drafted commission pay plan. If the agreement had been more ambiguous, or if it had failed to address what happens to commissions at the time of termination, Hostpro would likely have had to give Nein the commission pay. CEA Online subscribers can access our guide to drafting effective, legal commission pay plans.
We’ll have more on this decision in an upcoming edition of California Employer Advisor.
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