Compensation policies often include incentive plans as a way to gain employee loyalty and increase productivity. Poorly drafted plans with no expiration date, however, might come back to bite you. If you’re not careful, changing such an incentive plan can result in lawsuits from older employees.

What Happened

Between 1969 and 1976 “Leach,” “Graves”, and “Messier” joined the San Jose-Oakridge branch office of automobile insurer California State Automobile Association (CSAA) as sales representatives, or sales agents. They signed employment agreements providing that sales quotas would be reduced by 15 percent for representatives who reached the age of 55 with at least 15 years of service, and by a further 25 percent (for a total of 40 percent) for representatives who reached age 60 with 20 years of service.

In early 2001, CSAA adopted a new compensation plan without the reduced quotas for senior representatives for which these three representatives had been eligible (Messier and Graves were each 57 years old; Leach was 55). They continued to work for CSAA and reached the standard quotas for all sales representatives until early 2005, when Graves was terminated for falling below the standard quota. Leach and Messier were subsequently terminated for refusing to sign a mandatory acknowledgement of a revised compensation plan without reduced quotas.

In June 2005, the three representatives sued CSAA. The trial court dismissed the case before trial, and the representatives appealed.

What the Court Said

The Fair Employment and Housing Act prohibits an employer from taking adverse action against an employee because of the employee’s membership in a protected class—what’s known as “disparate treatment.” The representatives alleged that CSAA wanted to get rid of older representatives so it could keep the substantial commissions on renewal premiums (premiums paid on the renewal of existing insurance policies each year) that would otherwise go to them and that their terminations therefore constituted disparate treatment.

CSAA claimed that it had legitimate nondiscriminatory motives for eliminating the reduced quotas (which ultimately led to the terminations), including competitive business reasons and internal fairness. The Court of Appeal, however, characterized these reasons as “doubtworthy.”

The court also found that the agents submitted sufficient evidence of discrimination to send the claim to court. In particular, they presented testimony from other CSAA employees that suggested the company wanted to rid itself of older sales representatives who had a “huge book of business” and were “living on their renewals.” The evidence also included testimony that CSAA was “looking for new blood to go forward” and “cleaning house.” One CSAA manager allegedly said that if it were up to him, he would get rid of the “old slugs,” referring to several sales representatives who had been with the company more than 25 years.

The representatives had also made a claim for breach of contract. They contended that CSAA failed to perform a promise—which it held out to them continuously for more than 2 decades—to employ them under a relaxed performance standard once they reached age 55 with 15 years in service. The trial court dismissed this claim.

The Court of Appeal noted that the most obvious reason for the reduced-quota provision was to give workers with large books of business an incentive not to stray. The three representatives fulfilled the stated conditions for the promised sales quota reduction, staying with CSAA for more than 25 years, but none of them was ever permitted to enjoy it. Each was eventually terminated for either falling below the unadjusted quotas or insisting on the right to do so.

Although the provision didn’t specify its duration, CSAA countered that it was entitled to rescind its promise because the policy had been in effect a “reasonable time.” Without accepting CSAA’s premise, the court found that CSAA didn’t even establish that its obligation had lasted a reasonable time. The obligation wasn’t triggered, after all, until the representatives reached age 55 with 15 years of service, and CSAA rescinded the provision shortly after the representatives qualified for the promised benefit. CSAA therefore received the immediate benefits of a loyal, stable workforce, while yielding nothing in return. The Court of Appeal reversed the dismissal of the disparate treatment and breach of contract claims, sending them back for a trial. McCaskey v. CSAA, Calif. Ct. Appeal (Dist. 6), No. H032186, (2010).

Practice Tip

In hindsight, CSAA probably could have avoided all of this by including an expiration date in the original agreement, or at least offering the eligible representatives some other type of acceptable compensation for terminating the original deal after they had held up their end of the bargain. If you want to rescind an existing policy that didn’t specify its duration when first implemented, consult an attorney about what you can do to preempt lawsuits by older or other employees who might be affected.

Managers should avoid using derisive or potentially inflammatory language when referring to workers who are 40 years old or over. Even the use of common expressions like “new blood” and “cleaning house” can making damning evidence of discriminatory intent in front of a jury.