SALES COMMISSIONS – A COMMON SOURCE OF TROUBLE

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By: Claudia D. Orr

It seems there are always lawsuits for unpaid commissions.  This one caught my eye because the employer proved several breaches of the agreement, but was not awarded any damages. Let’s look at Waalkes v Resource Communications, Inc, a newly issued unpublished opinion of Michigan Court of Appeals.

In October 2010, Resource Communications, Inc. (RCI) entered an employment contract with Jon Waalkes to work full-time selling its products. Under the agreement, Waalkes would be paid 50% of gross profits on the sales he made. When Waalkes reached a financial goal of $750,000, gross profits, the contract would terminate.

By September, 2015, Waalkes was quickly approaching the goal and gave written notice of his intent to leave the company and to start working in a similar capacity with the same customer and vendor base for his newly formed company Design Create Solve, LLC. The parties began the separation process and determined that $705K gross profit had already been attained and another $30K had been invoiced/ordered and was in process.  There was a discussion about the remaining $15K being offset against amounts that would be paid to Waalkes in commissions.

Instead of entering a written modification of the agreement, RCI sent Waalkes a notice that his plans were in violation of their agreement.  RCI locked Waalkes out of the computer system making it impossible for him to access customer files or issue any further “computerized” purchase orders. Waalkes continued to hand write purchase orders and transmit them to RCI via photos sent via his cell phone. This creative means of transmitting orders resulted in a time sensitive order being mishandled. In October 2015, Waalkes began working for his new company.

Waalkes filed a complaint seeking a court’s declaration of the parties’ rights. RCI (and its owner) filed a counter claim to protect the client base.  The parties agreed that Waalkes eventually sold $751K in gross profits, but RCI argued that Waalkes’ work with it ended prematurely because some of the invoices were still “in process” at the time of his departure and he did not meet the sales goal until February 2016, long after he left RCI. Waalkes asserted that being locked out of the computer system delayed his ability to meet the financial goal sooner, but that he actually eventually exceeded the goal that had been established.

The trial court found that Waalkes, in fact, had breached the employment agreement by engaging in competitive business activities prior to reaching the goal, but also found that RCI was not harmed by the breaches because it had received $750K in sales.  The court, however, enjoined Waalkes from soliciting business from RCI’s customers as prohibited by the employment agreement.

RCI appealed the damages ruling. On appeal, the court found that RCI had received the benefit of its bargain and did not suffer any compensable damages.

This case shows that even if you can prove your employee breached his employment agreement, you may not be entitled to damages unless you can prove you were harmed.  While it may not have changed the outcome of this case, sometimes a liquidated damages clause can be the answer. Commission agreements are tricky to write.

The agreement should address the event that causes the commission to be earned (i.e.,  when the product order is signed by the customer, the product is shipped, the payment is made or perhaps 30 days after payment is received assuming the customer has not returned the order).  The terms of the agreement were not stated in the case discussed above,  but the agreement may have lacked this term because work invoices were still “in progress” at the time Waalkes left the company.

A commission agreement should also reflect how soon after the commission is earned that it is to be paid (i.e., within 30 days, at the end of the following month, at the end of the quarter, 30 days after the fiscal year, etc.). Also, it doesn’t hurt to have the parties expressly disavow any application of the procuring cause doctrine which can be used by the sales person to argue for commissions for the life of the customer or product.

Better yet, if your company is selling goods, consider creating a bonus program instead of paying sales commissions so that you will not be subject to the sales representative statute in Michigan.  This is far safer for the company and allows it to determine whether to pay commissions that become due after termination of employment.  What’s the difference and how do yo do this?  This is one of the topics that will be addressed during DSHRM’s webinar on October 23, 2018 entitled “What’s new and what to do about it”.  Register now to save your “seat”.

This article was written by Claudia D. Orr, who is Secretary of the Board of Detroit SHRM, a member of the Legal Affairs Committee, and an experienced labor/employment attorney at the Detroit office of Plunkett Cooney (a full service law firm and resource partner of Detroit SHRM) and an arbitrator with the American Arbitration Association.  She can be reached at corr@plunkettcooney.com or at (313) 983-4863. For further information go to: http://www.plunkettcooney.com/people-105.html.  

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