Put it in Writting

Posted on October 26, 2023 in Consulting, Employment Litigation

A few years ago, I won a bench trial when I convinced a judge that my client owed a former employee a $43,000 bonus and not the hundreds of thousands the plaintiff claimed.   That’s right. The win was still a loss in the sense my client wrote a check.  We owed the money.  The dispute was how much. So why did this go to trial: the company failed to think through the “what-ifs” that every employer should clarify in a written bonus (or commission) policy.

The lessons are simple:

• A poorly written bonus or commission policy promotes disputes.
• An employer without a written bonus/commission policy is asking to be sued.
• The business with a published, well-thought bonus and commission policy avoids the courthouse.

Too often employers make excuses for their inability to memorialize their bonus and commission plans. Most often I hear companies say that the plan is too complicated to write-out, but our employees understand the arrangement.  Sorry, but that’s a lame excuse.  Every bonus/commission plan can be reduced to writing.  It might require the assistance of an objective third-party to craft the plan.  Good lawyers take what a client envisions as complicated and craft a document that the average Joe understands.

The Texas Supreme Court made the necessity of a written commission policy even more important a year ago in its holding in a case called Perthuis v. Baylor Miraca Genetic Laboratories, LLC, 645 S.W.3d 228 (Tex. 2022).  In very general and simple terms, the case involved an employer who promised to pay a commission of 3.5% on sales to an executive and then fired the employee just as he closed a large transaction.  The employer refused to pay the commission claiming the employee was no longer eligible for the bonus because his employment ended.  But the requirement that he be employed was not in writing.  The Texas Supreme Court ruled that because the employee procured the sale, he earned the commission.  The Court noted that if the employer wanted to make employment a condition for earning the commission it could have said so in writing.  The holding seems equally applicable to sales-based bonuses.

Setting out the rule for post-employment bonus/commission entitled is just one critical consideration in drafting a policy.  A bonus/commission plan must address among other factors:

• Eligibility criteria;
• Calculation methodology;
• Define key terms in simple language; and
• Specify discretionary components.

January 1 is a great time to roll out a revised or new bonus/commission plan.  Consider reviewing your bonus or commission plan before the new year.