Written Disclaimer Does Not Protect Against Commission Cap Suit

by Steve Bogue

(402) 341-3070

Can a company reserve the right to unilaterally reduce sales employees’ commissions in certain situations?  Two courts that recently faced that issue answered “not always!”  Although it is a common business practice when  sales commissions are to be paid  to have the salesperson agree in writing that the company has the right to revise or depart from the compensation plan in certain situations, such agreements may be cancelled out by other statements or communications by the company.

Two recent lawsuits were filed against IBM alleging that IBM improperly reduced commissions for two employees, who had signed agreements allowing IBM to do just that, but them told the employees that there was “no limit” to their earning capacity. Those courts rejected IBM’s attempts to get the cases dismissed, concluding that a jury should decide whether statements to the salespeople which appeared to contradict the written disclaimers should negate the company’s ability to adjust commission payments.

In the first of those cases, Fessler v. IBM Corp., IBM drafted incentive plan letters which warned that it could adjust the salesperson’s compensation for various described reasons. The employees had agreed to and signed those letters. IBM argued that those agreements put Fessler on notice that he might not receive the full commission based on his sales and that he should not be allowed to argue that any conflicting information, in effect, canceled that agreement. He claimed that his commissions were improperly reduced. The court pointed out that on at least six separate occasions IBM made PowerPoint presentation to groups including Fessler that represented that his commissions and earning opportunities for commissioned sales employees were uncapped and, further, that those representations were reiterated by managers during sales meeting presentations. When IBM countered that they had reduced his commissions due to budgetary matters, which it alleged was covered by the written agreements, Fessler responded that he believed that commissions could only be adjusted for errors and couldn’t be capped as attempted by IBM.

Again, neither the Fessler case nor a subsequent case have gone to trial or been submitted to a jury. However, the lessons to employers who utilize commission sales systems is clear: even though an employee might have signed off on a commissions program which reserved to the company the ability to reduce or adjust commissions based upon certain situations, the company must make sure that representations made to employees during sales campaigns and sales meetings do not contradict the plan’s written disclaimer. The difficulty in such situations arises when the company’s H.R. department and finance department seek to carve out as much flexibility to the company as possible to adjust the commission system and prevent windfall commission payments, while the sales department’s efforts to rev up their sales force by extending the carrot of unlimited earnings. Representations to a commissioned salesforce should always be coordinated and communicated uniformly throughout the company. The failure to do so may result in extended and multiple court cases.

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