Texas Supreme Court to Texas Employers: Terms of employee sales commission agreement must be clear or commissions could be owed long after employee is terminated – Employee Benefits and Compensation

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The Texas Supreme Court recently established a “default rule” which, as the dissent puts it, may “threaten the expectations of employers and at-will Texas employees who have agreed to a commission structure but, for whatever reason, failed to reduce it to writing with perfect clarity.” Perthuis vs. Baylor Miraca Genetics Lab’ys, LLC, no. 21-0036, 2022 WL 1592587, at *12 (Tex. May 20, 2022). Based on century-old opinions regarding real estate brokerage commission contracts, the
Perthuis the majority opinion held that an at-will employee who receives a commission as part of her compensation should continue to receive commissions on sales made long after the employee’s termination if (1) she was the “cause of supply” of sales, and (2) the commission agreement between employer and employee “does not mention any exceptions” to this default rule. Identifier. to 1. In addition, this employee can establish that she was the “cause of the pimping” by proving that she “triggered a chain of events[…]which, without a break in their continuity, lead the buyer and the seller to agree on the sale at the moment when the primary and direct result of the [employee]His efforts.” Identifier.to *9 (internal quotes omitted).

The agreement in question Perthuis provided that the requesting employee is entitled to a commission of “3.5% of the [the
employee’s] net sales.” Identifier. at 1. The agreement did not define “net sales” or “place any other parameters on the commission obligation.” Identifier. Prior to the employee’s termination, he had negotiated a contract amendment with one of the employer’s largest customers that significantly increased the customer’s minimum purchase requirements in the future. Identifier. to *2. The employer later refused to pay the employee any further commissions on sales to that customer completed after the employee was terminated, and the employee sued for breach of contract.
Identifier. At trial, the jury was told that the employee’s ‘net sales’ included those for which he was the ‘procurement cause’ – resulting in a jury award of over $1 million. dollars in damages. Identifier. The Court of Appeal reversed and entered judgment in favor of the employer, (1) finding that nothing “in the agreement of the parties… indicates that [the employer] agreed to compensate [the employee]for sales from customers he “obtained” even after” the employee’s termination, and (2) rejecting the employee’s argument that “the sourcing cause standard applies to determine all sales commissions”. Baylor Miraca Genetics Lab’ys, LLC vs. Perthuis639 SW3d 108, 117 (Tex. App.—Houston [1st Dist.] 2020). The Texas Supreme Court disagreed – finding that the “procurement cause doctrine” provides a default rule for any “agreement to pay commission on a sale” that does not contain terms “inconsistent with the default rule”.
Perthuis2022 WL 1592587, at *6.

So what terms should Texas employers add to their sales commission contracts if they wish to avoid the pimping cause doctrine? The Court ruled that there is no “magical language” required – any language inconsistent with the doctrine suffices. For example, the contract could deny payment of commissions on sales that close after termination or limit commissions to a specific period after termination. Identifier. As the Perthuisinformed dissent, in the absence of such language, Texas employers run the risk of being sued by employees at will for commissions “for any sales” they “trigger” and will be “stunned to learn that , under the default rule, the right to commissions may extend years after the termination of their employment relationship. Identifier. at 12.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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Aurora J. William