A
a staggering $12 million verdict for an employee who claimed he was owed
payment under a commission agreement and was terminated when he tried to
enforce that right. We’ll explain why the appeals court sided with the employer
and how careful drafting can be key to preventing and defending wage suits.
Commission Plan Amended
Ted Marx was an account
executive for Storage Technology Corp. (STK), which manufactures, sells, and
services computer data storage systems. Marx’s employment was governed by an
account executive incentive plan (the Plan) that provided for target, margin, and
revenue incentives, or commissions.
The Plan stated that
Marx would earn a commission when a sale directly to an end user amounted to
revenue in accordance with the company’s “revenue recognition policy.” This
policy provided that a deal wasn’t considered complete—or “revenue
recognized”—and a commission wasn’t earned until certain criteria were satisfied.
Language elsewhere in the Plan confirmed that wages were not considered earned
until all of the various facets of the incentive were calculated and determined.
The Plan also stated
that STK could unilaterally change the Plan’s terms at any time, prospectively
or retroactively, and it offered account executives the opportunity to request
Plan changes. Requests had to be in writing and would be reviewed by various
managers and senior administrators. The Plan did not require STK to grant employee
requests.
Eventually, STK amended
the Plan by removing the sale of used products from the commission calculation.
A few weeks later, Marx sent a memo to STK requesting that six used-equipment
deals he had entered into before the Plan change be grandfathered in and paid in
accordance with the original Plan terms. His request noted that these six deals
“generated extra margin” for the company.
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
Dispute Erupts
When STK didn’t pay Marx
a commission on the six deals, Marx filed a claim with the California Division
of Labor Standards Enforcement (DLSE) for unpaid wages. A few months later, STK
discharged Marx.
Marx turned around and
sued STK for failing to pay the commissions and for wrongful discharge in
violation of public policy (that he was fired in retaliation for demanding the
commission payment). STK argued it wasn’t required to pay commissions on the
used-equipment deals. It also contended that Marx was terminated not over the
commission dispute but because he was belligerent and ignored management’s
instructions regarding sales techniques and which products to sell.
Huge Jury Verdict for
Employee
A
jury sided with Marx, ordering STK to pay him $111,922 in unpaid commissions
under the Plan. It also ordered STK to pay Marx $2.76 million for wrongful
discharge, finding that Marx’s request for the commissions or his claim with
the DLSE was a motivating reason for his termination. The jury then tacked on a
staggering $9 million in punitive damages— for a total verdict of almost $12
million.
Plain Language of Plan
Prevails
Now a
of the verdict, ruling that Marx’s claim for commissions wasn’t viable because
the Plan clearly spelled out when STK would pay a commission.
In particular, the Plan,
in conjunction with the revenue recognition policy, imposed conditions that had
to be satisfied before a commission was earned. Because the Plan was modified
to exclude used-equipment deals from the incentive calculation, the six deals
Marx had pending at the time of the Plan change could not qualify. The court
also explained that STK was within its rights, by the Plan terms, to
unilaterally amend it at any time to change the commission requirements and
conditions. Also, the court pointed out, even though Marx was allowed to
request an exception for those deals, nothing in the Plan obligated STK to
accept it, and the company in fact did not accept it.
No Public Policy Claim
The appeals court also
rejected Marx’s claim for wrongful termination in violation of public policy.
The public policy on which Marx based his suit was the company’s obligation to
pay wages—in this case commissions— when due. The court agreed that the prompt payment
of wages is a fundamental public policy. However, because the court already
found that STK did not breach any wage obligation, it followed that no public
policy was violated.
Drafting Tips
The employer in this
case dodged an expensive bullet because, as the court found, the commission
agreement was clear as to when a commission was earned and payable. If you use
commission agreements, here are some practical suggestions to help make sure they
will hold up to a legal challenge:
1. Spell out the
commission terms. The agreement— which should always be in writing—should specify
the prerequisites or conditions that must be met for the employee to earn the
commission.
2. Make the conditions
clear. If
a provision is important, don’t bury it in the fine print. You’ll be on good
legal footing if employees are fully aware of what qualifies as a
commissionable deal. But, points out Marc Jacuzzi, a lawyer with the firm of
Simpson, Garrity & Innes in
San Francisco
challenges them, a court will likely construe the agreement in the employee’s
favor.
3. Get it signed. Make sure you have
employees sign a copy of the commission agreement, acknowledging that they have
read, understood, and agree to its terms.
4. Reserve the right to
make changes. Although STK’s Plan gave the company the right to unilaterally, and
retroactively, change the terms, Jacuzzi says that the better practice is to
state that you reserve the right to make plan changes on reasonable notice to
the employee.
You can find the new
case online at www.courtinfo.ca.gov/opinions/continue.htm.
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1 Marx v. Storage
Technology Corp.,
Court of Appeals (2nd Dist.) Nos. B178202, B182100, 2006