Texas Supreme Court to Texas Employers: Terms of Employee Sales Commission Agreement Must Be Clear Or Commissions Could Be Owed Long After Employee’s Termination | Butler Snow srl

The Texas Supreme Court recently established a “default rule” that, as the dissent puts it, can “threaten the expectations of employers and at-will employees in Texas 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 “is silent on any exceptions” to this default rule. Identifier. to 1. In addition, this employee can establish that she was the “procuring cause” by proving that she “triggered a chain of events… which, without interruption of their continuity, lead the buyer and the seller to agree on the sale as the first and direct result of the [employee]’s efforts. Identifier. to *9 (internal quotes omitted).

The agreement in question Perthuis provided that the requesting employee is owed 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. at 2 o’clock. The employer subsequently refused to pay the employee any further commission on sales to this customer made 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”, which resulted in the jury awarding more than one 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 had “purchased” even after” the employee’s termination, and (2) rejecting the employee’s argument that “the sourcing cause test 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 was 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 Perthuis informed dissent, in the absence of such language, Texas employers run the risk of lawsuits from employees at will for commissions “for any sale” they “set in motion” and will be “astounded at learn that, under the Default Rule, the right to commissions may extend years after the end of their working relationship. Identifier. at 12.

Aurora J. William