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Employer’s Right To Modify Commission Needs To Be Clear

On Behalf of | Jan 10, 2018 | Employment Law

A recent New Hampshire Supreme Court decision confirms that employers must be extremely careful in clearly defining their ability to modify a bonus or commission under New Hampshire law.  In the New Hampshire Supreme Court December 21, 2017 decision of International Business Machine Corporation (IBM) v. Gary Joseph Khoury, the Court confirmed a trial court’s ruling that Khoury is entitled to commissions in the amount of $71,946.27 plus statutory interest and the attorney’s fees he incurred both at the New Hampshire Department of Labor and at the Superior Court.  In January 2013, Khoury began working for IBM as a sales representative and remains a current employee of IBM where he earns both base salary and commissions.  In mid-July 2014, IBM presented Khoury with an Incentive Plan Letter with a plan period of July 1, 2014 through December 31, 2014 which it provided itself the right to modify or cancel the plan at any time during the plan period up until any related payments had been earned under the plan terms.  IBM put in several other provisions within the letter which stated IBM had the opportunity after the period to reassess to see whether or not the commissions being offered to the sales people were too high, and, therefore, claimed that it did not owe any more commissions than what it had already paid to Khoury under the plan.  Khoury countered that he earned the commissions during the sales period under the terms of the plan and a reasonable interpretation of the plan language of the right by IBM to modify the commission still entitled him to an additional $71,946.27.

For employers the takeaway is that if an employer wants the right to go back retroactively and modify the formula for any bonus or sales commission to reduce the employee’s commission or bonus, the employer must clearly disclose in writing to the employee that right prior to the employee working toward that bonus or commission.

The majority of the court concluded that a reasonable person in the position of IBM and Khoury would construe the plan letter to present Khoury with a limited contractual offer that if he performed satisfactorily under the terms imposed by the plan and if IBM had not adjusted the plan terms prior to the time his commissions were earned, IBM became obligated to make the commission payments to him as originally calculated.  While there was a Supreme Court Justice that dissented from the majority of the Court’s decision, that dissent focused primarily on the specific contractual terms of the IBM plan letter.  The Court further noted that it agreed with the trial court that the wage statute and regulations require employers to provide a clear writing to the employee of his compensation and that includes commissions.  The Court further stated that the purpose of the wage statute and regulations is to ensure that employees understand the rate of pay and any changes thereto, including the manner in which commissions are calculated and paid. The Court therefore determined that construing any ambiguity to a commission plan in favor of the employee would further that purpose. Simply put, as an employer you do not want your commission plan the subject of different interpretations from judges. You want the plan clear as can be in plain English.

The Court further agreed with the trial court that the wage statute allows the employee, upon success of the wage claim, reimbursement of his attorney’s fees, incurred at the New Hampshire Department of Labor in addition to the Superior Court.  Often in these wage claims, the original process begins at the New Hampshire Department of Labor in Concord so the employee having the right to reimbursement of his reasonable attorney fees at the Department of Labor is an important right. If the employee files the claim with the New Hampshire Department of Labor, the hearing is often scheduled a lot quicker than in the Superior Court and the employee can still have an attorney represent him or her.  If the employee gets a favorable decision, he can seek to enforce it, or the employer can appeal, to the Superior Court.  Thereafter any appeal goes to the New Hampshire Supreme Court as this appeal did.

In summary, if an employer wants the ability to have complete discretion as to a commission or a bonus, the employer should speak with an attorney to carefully draft the commission or bonus plan to make sure the commission or bonus plan provided to the employee clearly states that discretion. That said, such discretion may not always achieve the sought revenue goal of the employer because an employee that knows the bonus or commission is purely discretionary may not be as incentivized to achieve the employer revenue goal than an employee that has a clear plan of “if you achieve this result, you get that compensation”.

J. Daniel Marr is a Director and Shareholder at Hamblett & Kerrigan, P.A. His legal practice includes counseling businesses and individuals on a variety of legal issues and advocating on their behalf. Attorney Marr is licensed and practices in both New Hampshire and Massachusetts. Attorney Marr can be reached at [email protected].