Under New Hampshire law, an employer must notify an employee of any change to his rate of pay before the change takes effect, and that includes any change to the manner in which commissions are calculated and paid. The primary purpose of this rule is to ensure that employees completely understand how they will be compensated for their work and employers can’t retroactively alter the terms of payment to employees’ detriment.

But what if the employer specifically retains the right to later alter an employee’s commission structure in a document acknowledged and agreed to by the employee? That’s exactly the question recently presented to the New Hampshire Supreme Court.

Background

Gary Khoury is a sales representative for IBM. As a sales representative, he receives both a base salary and commissions. His eligibility for commissions is laid out in an individualized incentive plan letter (IPL), which is modified and reissued approximately every six months.

In July 2014, IBM gave Khoury an IPL that said he would receive commissions if he made at least $571,000 in sales before December 31, 2014. The IPL, however, contained several disclaimers. For one, IBM stated that it wasn’t to be considered a contract. The company also reserved the right to modify or cancel the IPL “up until any related payments have been earned.” Payments were considered “earned” once IBM business results for the period in question were complete. For the period between July and December 2014, the results were “complete” on January 15, 2015.

At that time, Khoury was told he had met and surpassed the $571,000 quota and that he was entitled to a commission payment of $154,124.21. However, IBM soon realized that the quotas were too low. So instead of paying Khoury the full commission payment, it retroactively increased his quota to $1 million, thereby reducing his commission payment by $71,946.27.

Case History

Khoury initially filed a claim for the outstanding commission payment with the New Hampshire Department of Labor (NHDOL). The NHDOL decided in his favor, stating that IBM had violated RSA 275:49 and N.H. Admin. Rules, Lab 803.03(c), which together require employers to notify employees in writing of any changes to their rates of pay before the changes take effect. IBM appealed that decision to the New Hampshire Superior Court, but the court sided with Khoury and upheld the decision. IBM then appealed the superior court’s decision to the New Hampshire Supreme Court.

The Decision

On appeal, IBM argued that:

1. It has no obligation to pay commissions to Khoury because the IPL isn’t an enforceable contract;
2. RSA 275:49 and Lab 803.03(c) don’t apply because Khoury isn’t owed any “wages” (again, because the IPL isn’t an enforceable contract); and
3. Even if the IPL were an enforceable contract, IBM is free to modify its terms at any time.

Unfortunately for IBM, the supreme court wasn’t convinced by any of its arguments. Even though the IPL specifically said it wasn’t a contract, it simultaneously limited IBM’s ability to cancel the agreement (the IPL could be canceled only “up until any related payments have been earned”) and imposed on the company an obligation to pay the employee (once the commission payments were considered “earned”). The court felt that a reasonable person would view the IPL as establishing a default scheme for the calculation of commission payments, albeit one that could be adjusted by IBM up until those payments had been earned. Thus, a contract was borne, and IBM was legally obliged to pay Khoury at least some commissions as wages.

The court then turned to the question of whether IBM’s March 2015 decision to retroactively change Khoury’s quota was permitted under the terms of the IPL. Again, IBM reserved the right to modify or cancel the IPL “up until any related payments have been earned,” and payments were considered “earned” once the company’s business results for the period in question were complete. The business results for the period in question were known on January 15, 2015, months before IBM altered Khoury’s quota. The company, however, attempted to argue that the language gave it the right to alter the quota up until it had assessed the impact of the business results.

The court rejected that argument and determined that the plain language of the IPL meant that IBM’s right to make any adjustments ended on January 15, 2015. To be clear, however, the court didn’t say that such a provision would be unenforceable. All the court decided was that in this specific instance, IBM’s decision to retroactively alter Khoury’s quota after assessing the impact of the business results was prohibited given that it didn’t clearly reserve that right in the IPL.

The court found support for that decision in Galloway v. Chicago-Soft, a 1998 case in which the New Hampshire Supreme Court noted that as a general rule, a person employed on a commission basis is entitled to a commission as soon as the order is accepted by the employer and that the general rule can be altered only by written agreement between the parties or by conduct of the parties that “clearly demonstrates a different compensation scheme” (emphasis added). The court felt that nothing in the IPL “clearly” informed Khoury that his payments wouldn’t be earned until months after the business results were known, and thus, IBM’s argument was rejected. IBM v. Khoury.

Key Takeaways

For employers, the most important takeaway from this decision (and, similarly, Galloway v. Chicago-Soft) is that commission agreements must be carefully crafted. If you want to deviate from the general rule that commissions are due as soon as an order is accepted by the employer, then you must provide a clear explanation of the desired compensation scheme in the employee’s contract as well as all other compensation-related documentation. That includes explaining exactly when commissions are owed to the employee (in other words, when the commissions will be considered “wages” under the law).

Had IBM done a better job drafting the IPL, it could have successfully altered Khoury’s quota once it realized the quota had been set too low. Instead, IBM was forced to pay Khoury the additional $71,946.27—plus interest and attorneys’ fees—which is a position in which no employer wants to find itself.

Paul Lopez is an associate of Sheehan Phinney’s Labor and Employment Group and a contributor to New Hampshire Employment Law Letter. You can reach him at plopez@sheehan.com.