A recent Texas Supreme Court decision made it harder for an employer to dodge an obligation to pay a commission by firing the employee responsible for that sale at the last minute. The Court clarified that commission contracts should be interpreted according to the century old procuring cause rule, unless the parties had explicitly agreed to other terms. If the employee produced the sale and the employment agreement was to pay a commission, then the employer may not claw back the commission by firing that employee.
The procuring cause rule says that an at-will employee who receives commissions as part of a compensation package must continue to receive commissions on sales consummated after the employee’s termination if the fired employee caused the sale. Contracting parties may agree to other terms, but these must be explicitly set out in the compensation contract or employment agreement.
Top employees are often offered complicated compensation packages. These may include salary, commissions, performance bonuses, stock awards, other forms of incentive compensation, and severance benefits. The salary provisions are straightforward. The other elements are more troublesome. The legal requirement that commissions terms be set forth explicitly in an employment agreement allows them to be negotiated. Performance bonuses, incentive compensation, whatever the terminology, are pieces of a puzzle. Hiding the ball is a poor strategy that can hurt both parties. Most agree that careful, honest, and thorough negotiation is better for all parties to an employment agreement.
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If you have questions about an employment agreement or a commission contract, click on this link to get the conversation started Contact Kilgore & Kilgore. Sometimes even the best laid plans go awry, though, and we are here to help you through employment agreement negotiations. We offer a free review of the facts of your situation. To learn more about commission contracts and employment agreements, click this link Executive Compensation.
The Employment Agreement in this Case — Stunning Success and an Abrupt Firing
In 2015, a company hired a Vice President of Sales and Marketing. The company drafted an employment agreement, which the candidate signed without alteration. The agreement gave the new VP an annual base salary of $145,000 and stated that the employment would be at will. It also provided a commission of 3.5 percent of the VP’s net sales. There was no definition of net sales and no other explanation concerning the commission arrangement in the employment agreement.
After months of negotiation, the VP secured a prominent client’s agreement to amend its sales contract. It was the largest contract of its kind in the company’s history. The commission due the VP would have been roughly $1 million. The VP relayed his success to company leaders. The CEO immediately requested a meeting with him. As it turned out, this meeting was not to congratulate the VP, but to fire him, effective immediately. The next day, the client signed the sales contract amendment that the VP had negotiated. The company did not pay the VP any commission, so he sued.
The Trial Court Decided in Favor of the VP
At trial, the court instructed the jury that the VP’s sales included all sales for which he was the procuring cause. A procuring cause is the principal and immediate cause of a sale. The Court reiterated that it need not be the sole cause, and an agent is said to be the procuring cause of a sale when his acts have so contributed to bringing about the sale that but for his acts the sale would not have been accomplished. The fact that the VP was discharged prior to the time this sale was completed does not bar his right to a commission if he was the procuring cause of the sale. The jury found for the VP. He was awarded over $900,000 in compensatory damages for unpaid commissions and over $80,000 in prejudgment interest, and post judgment interest at five percent.
The Court of Appeals Reversed the Judgment of the Trial Court
The Court of Appeals for the First District of Texas reversed the trial court’s decision and rendered judgment for the company. According to the appeals court, the contract unambiguously entitled the VP to commissions only for sales made during his employment, not for sales that closed after he was terminated.
Texas Supreme Court Reversed the Court of Appeals Decision
The Texas Supreme Court reversed the appeals court decision, holding that: “When a seller agrees to pay a sales commission to a broker (or other agent), the parties are free to condition the obligation to pay commissions however they like. But if their contract says nothing more than that commissions will be paid for sales, Texas contract law applies a default rule called the ‘procuring cause doctrine.’” Under that rule, the broker is entitled to a commission when “a purchaser [was] produced through [the broker’s] efforts, ready, able, and willing to buy the property upon the contracted terms . . . In this case, the agreement between the parties was silent about any exceptions to the duty to pay commissions for sales that petitioner procured. The procuring cause doctrine therefore applies.”
At Will Employment: An Employer May Terminate an Employee Any Time With or Without Cause
This decision of the Texas Supreme Court decision may contain hope on future challenges to this application of the procuring cause rule. In this case cited here, the appeals court questioned whether the application of a doctrine originally developed in the context of real-estate sales is appropriately used in the context of at-will employment. Does an independent broker have more rights to a commission than an at-will employee who is also paid commissions? At the very least, employees whose compensation includes commissions should anticipate that many employers will now amend their employment agreements to limit commission payments through terminations of employment.
Notably, this decision, taken together with the recent decision in the case of Crane v. Rave Restaurant Group, is good news for those seeking to enforce employment contracts and an employer’s promises, especially when it appears that an employer is backing out of a deal after the executive has substantially performed his or her part of the employment contract. Here is the link to that article Fired CEO Sues Former Employer Over Stock Award.
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