Texas Supreme Court Clarifies: Employee Agreements Must Specify When Commissions Are Earned, and Paid, Or Commissions Could Be Owed After The Employee is Terminated

For many years, employers and employees regularly litigated whether former employees were owed commissions on sales made before the termination of the employee’s employment.  In some cases, an employment agreement would clarify the issue by clearly providing that commissions would be paid when the employer received payment for a completed sale.  On the other hand, some employment agreements are unclear on the topic.

However, on May 20, 2022, the Supreme Court of Texas, in Perthuis v. Baylor Miraca Genetics Laboratories LLC, clarified the standard to be applied in these situations.

Background

In Perthuis, the plaintiff was vice president of sales and marketing for Baylor Miraca Genetics Laboratories.  In early 2015, the company drafted, and the plaintiff signed, a two-page employment agreement that provided the following: “Your commission will be 3.5 percent of your net sales.” The employment agreement did not contain any other explanation concerning the commission arrangement.  Additionally, the employment agreement did not define “net sales” or “place any other parameters on the commission obligation.”

In January 2017, the plaintiff negotiated an amendment to a sales contract with one of the employer’s major clients, making the contract the largest of its kind in the company’s history.  The company terminated the plaintiff’s employment on January 23, 2017.  The next day, the client signed the contract amendment that the plaintiff had negotiated.  The employer subsequently refused to pay the employee any further commissions on sales that were finalized after the employee’s termination.

The plaintiff sued, seeking payment of the unpaid commissions from the contract.  In the trial court, the trial court judge instructed the jury on the “procuring-cause doctrine.” Under this rule of Texas contract law, the plaintiff would be entitled to the commissions if he was the “procuring cause” of the sales; that is if he was the but-for cause of the sales involved. Following deliberation, the jury found in favor of the plaintiff on all claims, but it did not award him the total amount of damages he sought.

Both the company and the plaintiff appealed.  The appellate court held that the procuring-cause doctrine did not apply and reversed the judgment for the plaintiff.  The appellate court determined that the employment agreement unambiguously entitled the plaintiff to commissions only for sales made during his employment.

The case ended up in front of the Supreme Court of Texas, where the Court reversed the appellate court’s decision, holding that in the absence of specific language specifying commission payment terms, the procuring-cause doctrine applies, and controls.

The Texas high court indicated that parties are free to put an agreement in place that clarifies when commissions are earned, and, importantly, when they will be paid.  However, in the absence of this language, the procuring-cause doctrine will apply, which provides that an employee will be entitled to commissions on sales, even after their employment terminates, as long as the employee is the but-for cause of the specific sales.

Key Takeaways For Employers

The Supreme Court of Texas’s decision provides a new default rule about when commissions will be earned and paid and whether they will be paid after the termination of employment.

The Court’s decision provides that the “procuring-cause doctrine” is the default standard to be used when commission agreements are silent concerning when commissions are earned or due. The decision also establishes that the employer and employee are free to implement guidelines concerning the payment of commissions.  In this regard, the Court held no “magic language” is required – any language inconsistent with the doctrine suffices.