Forfeiture of Commissions on Termination of Employment Upheld
On June 3, 2009, a California Court of Appeal issued a favorable decision for employers regarding post-termination commission claims.
The plaintiff was a salesman who suggested a transaction to his employer that was not consummated until a month after the employer terminated the plaintiff's employment. The plaintiff sued his former employer for failure to pay him any commission on the transaction.
The plaintiff's employment contract stated that he "will be eligible for commission pay … so long as he remains employed with the Company." The Court of Appeal ruled that this language "is reasonably susceptible to only one interpretation - that once plaintiff ceased to be employed by defendant, he would no longer be eligible for commission pay." Consequently, the Court of Appeal affirmed summary judgment in favor of the employer because "pursuant to the plain language of the written employment agreement, plaintiff was not entitled to any further commissions after he was terminated."
The Court of Appeal, however, made clear that the outcome would not necessarily be so favorable for employers in other cases because "there is an exception to this principle when a contract provision is unconscionable," which the Court of Appeal did not consider in this case because the plaintiff did not make that argument. The Court of Appeal gave as an example a previous case where a provision in an employment agreement that a salesman forfeited his right to a commission if he terminated his employment before his employer received payment for the sale was found to be unconscionable and therefore unenforceable.
Accordingly, commission agreements need be carefully analyzed and drafted to maximize the likelihood that a court will uphold the language on which the employer bases its decisions regarding commission payments. The case is Nein v. Hostpro, Inc. and can be found here.