I have handled many commission cases, where someone sues, claiming they are owed commissions. The key issue in such cases is to determine if there is a written contract and then to ascertain what the vesting provisions for the commissions are. After all, in most, if not all States, commissions do not become “wages” and therefore owed to the worker, until the conditions precedent in the contract have been met. A recent case, where the person was laid off due to COVID-19 issues and yet could not collect commissions based on the contract, makes this point emphatically. The case is entitled Peak v. TigerGraph and was filed in federal court in California.
The employee, a salesman living in Massachusetts, had a contract with his employer that set forth that the compensation was comprised of a base-salary and commission. The employment relationship was designated as “at will.” Lastly, the contract recited that California law would apply. The parties then replaced this first contract with another that deemed commissions to be earned when the Company received payment in full from the customer.”
In May 2020, the employee received work from a client, where he would have realized significant commission from. He sent the news to the Company COO and the next day, he was advised that he was being “laid off due to the financial impact on the COVID-19 pandemic.” He was the only sales representative laid off and he did not receive his anticipated commissions. He filed suit, alleging breach of contract/covenant of good faith and fair dealing, intentional interference with contractual relations, civil conspiracy, and other violations
The Court examined the contract and concluded there was no breach as no commission had been due and owing because none of the commission was earned prior to his layoff. The Court also rejected the implied covenant of good faith and fair dealing argument; the employee argued he was being separated when “on the brink” of receiving the commissions. The Court noted the “at will” nature of the employment relationship as laid out in the Agreement and the Company’s commission plans advised employees that “as a reminder, employment “is on an at will basis (except as otherwise provided by law) and may be terminated with or without cause, and with or without notice, at any time.”
Thus, because the contract was clear and the employee voluntarily agreed to it, the Court held that the Company “cannot be held liable for breach of contract or breach of the implied covenant for doing what they were expressly permitted to do by the terms of the employment agreement: terminate [employee] for any reason.” The Court also noted the terms of the contract, which paid commissions only upon the Company being paid, which it had not been on these various transactions.
This is a great lesson for employers. An employer cannot control if or where it will be sued, state court, federal court, an administrative agency, but the employer has control over the most important aspect of a case—the factual underpinnings. If the written commission agreement is drafted carefully (e.g. active employment when commissions vest provision) and explicitly provides for when commissions are earned and what happens to the commissions of an employee who is separated (voluntary or not), the Employer is putting itself in a great position to successfully defend a lawsuit.