Court of Appeal: No Post Termination Commissions for You

Here are the facts as stated by the court:

Defendant hired plaintiff as a sales representative on October 4, 1999. On that date, the parties entered a written employment agreement, which provided (among other things) that: (1) plaintiff was responsible for web-hosting sales; (2) plaintiff‟s starting salary was $24,000 per year, plus commissions of 4 percent "on all direct initial sales"; (3) defendant "will be eligible for commission pay as set forth in this [document], so long as [plaintiff] remains employed with the Company as a Sales Representative"; and (4) the employment agreement "may be amended only by a written agreement executed by each of the parties hereto."

In April 2001, defendant promoted plaintiff to "Channel Manager." The parties entered a new oral agreement that provided (among other things) that: (1) plaintiff‟s salary was increased to $75,000 per year, and (2) plaintiff would receive commissions of "„20% of the up front costs‟ revenues on all accounts brought in by [plaintiff] or through [plaintiff‟s] contacts or efforts."

So, the plaintiff was later fired and sought commissions for a transaction that occurred after he left, but which was (at least according to him) was "through plaintiff's contacts or efforts."

The court made short work of the plaintiff's argument that he was entitled to post-termination commissions. On plaintiff's breach of contract claim, the court held:

We agree with defendant that, on its face, the italicized 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. While plaintiff could have relied on extrinsic evidence (if there were such evidence) to suggest an alternative meaning of this provision, he did not do so. (Compare Wolf v. Superior Court (2004) 114 Cal.App.4th 1343, 1358 ["[T]his extrinsic evidence of trade usage exposed a latent ambiguity in the contract language and presented an alter[n]-ative interpretation to which the term „gross receipts‟ was reasonably susceptible in the circumstances."].) Accordingly, we conclude as a matter of law that the written employment agreement precludes plaintiff from collecting additional commissions post-termination.

On the plaintiff's claim under the Labor Code, the court said that although commissions are wages:

for purposes of enforcing the provisions of the Labor Code, "[t]he right of a salesperson or any other person to a commission depends on the terms of the contract for compensation." (Koehl v. Verio, Inc. (2006) 142 Cal.App.4th 1313, 1330; see also Steinhebel, at p. 705 ["contractual terms must be met before an employee is entitled to a commission"].) Accordingly, plaintiff‟s right to commissions "must be governed by the provisions of the [employment agreement]." (Steinhebel, at p. 705.) We have already concluded that, pursuant to the plain language of the written employment agreement, plaintiff was not entitled to any further commissions after he was terminated. Accordingly, defendant‟s failure to pay such commissions cannot constitute a violation of the Labor Code.
The court did not consider whether the commission contract was "unconscionable" because it was not pleaded. So, that door remains open in commission cases. However, the court also did not consider the question of whether commissions were "earned" before termination and therefore should have been paid. Presumably, that issue was not argued by the plaintiff. If your plaintiff makes this argument, this case could be distinguishable.

Finally, there is the argument that the employer fired the employee to avoid paying unpaid commissions. But the plaintiff waived that argument too. So, because this case was not as vigorously litigated as it might have been, be careful before you rely on it too heavily. On the other hand, the courts will enforce straightforward commission plans that contain contingencies on the right to payment, such as continued employment.

The case is Nein v. Hostpro, Inc. and the opinion is here.