Relying on the parties’ written employment agreement and compensation plans, a California federal district court held that an at-will employee who was laid off due to COVID-19 could not recover commissions that were not fully earned prior to his termination.  Peak v. TigerGraph, Case no. 21-cv-02603 (Sept. 7, 2021).

Background

The employee, a sales professional residing in Massachusetts, was recruited by the Information Technology company based in California, to work as a sales manager.  In January 2018, the parties entered into a written employment agreement, which provided, in relevant part, that (1) employee’s compensation consisted of base-salary plus a commission; (2) his employment was “at will”; and (3) disputes regarding his employment would be governed by California law and decided by California courts.  The parties also executed a sales compensation plan at this time.

In August 2018, the employee began to develop a relationship with a potential client.  In 2019 and 2020, the employer executed new compensation plans, which replaced the one entered when the employee began his employment.  The new compensation plans stated:  “Commissions are considered ‘Earned’ when the Company received payment in full from the customer.”

After executing the new compensation plans, on May 13, 2020, the employee received Statements of Work (SOW) for 20 anticipated projects from the client, from which the employee would have earned substantial commissions.  The employee forwarded the SOW to the employer’s Chief Operating Officer to execute.  The next day, the employee was informed that he was “being laid off due to the financial impact on the COVID-19 pandemic.”  No other sales representatives were laid off, and the employee did not receive any commissions.

The employee filed suit in Massachusetts, and the case was transferred to the California federal district court based on the forum-selection clause of the employment agreement.  The employee brought claims against his former employer for breach of contract/covenant of good faith and fair dealing, intentional interference with contractual relations, civil conspiracy, and violations of the Massachusetts Wage Act.

No Breach of Contract or Implied Covenant of Good Faith and Fair Dealing

The court held that there was no breach of contract, reasoning that there was no commission earned at the time the employee was terminated and, thus, the employer’s “refusal to pay him does not constitute breach.”

The court also rejected the employee’s implied covenant of good faith and fair dealing argument that the employer should be prohibited from terminating him in order to avoid paying the commissions owed when he was “on the brink” of earning the commissions.  The court cited the “at will” relationship set forth in the employment agreement and the fact that the company’s annual commission plans included the following clause:  “As a reminder, employment is on an at-will basis (except as otherwise provided by law) and may be terminated with or without cause, and with or without notice, at any time.”

Based on these express provisions to which the employee had consented by signing, the court concluded that the employer “cannot be held liable for breach of contract or breach of the implied covenant for doing what they were expressly permitted to do by the terms of the employment agreement:  terminate [employee] for any reason.”  The court also relied on the clear language in the commission plans that the employee was only entitled to a commission on a deal that resulted in a payment to the employer.  The court reasoned that the employer could not be held liable for a breach of the implied covenant for doing what it was entitled to do pursuant to the commission plans, namely “refuse to pay [employee] a commission for which [employer] did not receive payment.”

No Violation of Massachusetts Wage Act

Massachusetts Wage Act (“Wage Act”) section 148 expressly states that it only protects claims for a commission that has “been definitely determined and has become due and payable.”  While Massachusetts court have found employers in violation of the Wage Act and breach of the covenant of good faith and fair dealing where they terminate an employee for the purpose of avoiding payment of commissions, those cases involve a commission that the employee has earned under the terms of the commission structure.  The court concluded that the protection under the Wage Act did not apply because the employee did not yet earn the commissions under the express terms of the new compensation plans with his employer.

Conclusion

This case underscores the importance of written employment agreements that reflect the intentions of the employer, as well as having employees agree to the fact that he/she is an at-will employee (or other key contract terms) if subsequent agreements are signed with that employee, as they were in this case.