Issue 4 - 2006

Commission Plan Wording is Everything
Optional Commuting is not Work
Can A Bonus Plan Lawfully Deny a Future Bonus
To Terminated Employees?

Two recent California cases illustrate the importance of proper drafting of commission plans.

In the first case, internet service provider sales associates earned commission on accounts that were not cancelled within a specific time period after activation of service. A written commission plan provided that commissions would be paid at booking, but that they were not earned at that time. The plans also included provisions allowing the Company to impose "chargebacks" on all accounts that were cancelled within the specific time period. The employees agreed to the chargebacks by signing an acknowledgment. An employee sued claiming that the chargeback provision violated Labor Code Section 221 which prohibits an employer from collecting wages that have been earned. (Koehl v. Verio Inc. (Cal. Ct. App. 2006)).

In the second case, sales employees were paid "commission" based on a point system which rewarded them for selling longer subscriptions, winning daily sales contests and meeting weekly sales goals. The sales employees were also subject to a "chargeback" which was a deduction from their points earned on a sale if the customer cancelled the subscription within 16 weeks. These sales employees filed a class action against the Company claiming that it, also, had violated Labor Code Section 221 (prohibiting an employer from taking back any wages from an employee after they are earned). The written commission plan was unclear as to whether points were earned at the time of the sale or at some other point in the future. Also, the employees did not have to approve or acknowledge the chargeback policy in writing. (Harris v. Investor's Business Daily Inc., (Cal. Superior Court 2006)).

The employer won in the first case and lost in the second. In the first case, the plan clearly specified that chargebacks were only made before commissions were actually earned. The plan specified that the cancellation period had to expire before a commission was earned. In addition, the employees agreed to the chargebacks by signing an acknowledgment. In the second case, the plan was unclear as to when commissions were earned and was based upon a points system - which was not actually a commission plan at all. In addition, the employees were not required to acknowledge the plan or agree to it in writing.

The wording of commission plans is crucial to avoid commission claims. Employers must be careful to word all commission plans, commission contracts, commission memos, commission policies, etc. in a lawful way. Employers also should require that employees agree, in writing, to all lawful plans.

Disneyland offered certain employees the opportunity to park at a remote lot on Katella and ride a shuttle to Disneyland. The distance between the parking lot and the theme park was approximately 1 mile. Employees did not clock in until they reached Disneyland. An employee sought to bring a class action on behalf of all hourly Disneyland employees who parked at the Katella lot, claiming that they should have been compensated for time spent in the travel from the lot to Disneyland. (Overton v. Walt Disney Company, (Cal. Superior Court, 2006)).

Disneyland won this case. Disneyland did not require the employees to use the lot and, in fact, some employees took public transportation and did not use the lot at all. If the use of the lot and transportation is optional, it is not "hours worked" for purposes of computing time for non-exempt employees. Beware, however, that "optional work" as opposed to "optional commuting" is different. If an employer "suffers or permits" an employee to work, those hours must be compensated (e.g., permitting an employee to check and respond to emails from home.)

In California, bonuses are considered to be "wages" within the meaning of the Labor Code. When wages have been promised as part of the compensation and all conditions agreed to in advance for earning those wages have been satisfied, the promised wages must be paid. If the bonus plan is properly drafted to set out conditions which must be satisfied, including a condition that the employee be employed on the payout date, that condition may be enforced and the employee who is terminated prior to the payout date will not have "earned" the bonus wage and need not be paid it.

This principle was recently illustrated in the case of Neisendorf v. Levi Strauss & Co. In this case, the employee's compensation terms included her eligibility to participate in two bonus plans: the "Annual Incentive Plan" ("AIP") and the "Leadership Shares Plan" ("LSP"). The AIP bonus was based on both individual and company performance throughout the year. There was a target bonus amount established each year for every employee participating in the AIP; the actual payout could be zero, however. To be eligible for an AIP bonus, the individual must have met the plan's eligibility requirements. Payment eligibility was described in the plan documents as: "Unless termination is due to retirement, layoff, long-term disability or death, a participant must be an active employee of the company on the payment date in order to receive an AIP payment. AIP payments are generally made in February following the close of the fiscal year." The AIP plan further stated: "If an employee is involuntarily discharged (e.g . poor performance or misconduct) prior to the AIP payment date, that employee will have no right to AIP."

Eligibility under the Leadership Shares Plan worked similarly. The LSP was a long-term incentive plan that provided for potential payouts to eligible employees for each of years three, four and five if certain company performance goals are met. "Leadership Shares" were not assigned a value until the company's financial performance was determined and approval by the board of directors in January or February of the following year.

Neisendorf was terminated for unsatisfactory performance in November 2002. Bonuses for 2002 under both the AIP and the LSP were not paid to employees until February 2003. She was not paid a bonus for 2002 because she had been terminated for cause prior to the bonus payout date.

Neisendorf argued that she had earned the bonuses which were based on the company's profits for the period during which she had worked. She argued, further, that the eligibility requirement that she be employed at a date in the following year amounted to an illegal forfeiture of earned compensation.

The Court of Appeal disagreed, stating that it found "nothing in the public policy of this state concerning wages that transforms Neisendorf's contingent expectation of receiving bonuses into an entitlement." It held that an employer is not required to provide a bonus to an employee unless and until an employee has fulfilled all conditions of the bonus plan in accordance with the terms of the bonus plan. Because the terms of the bonus plans explicitly precluded employees who were involuntarily terminated prior to the payout date from receiving a payout, and because the plaintiff was terminated for cause before the bonus payout date, Neisendorf did not meet the conditions of the plans and was not eligible for a bonus payout.

Employers who maintain bonus plans which have eligibility criteria similar to those at issue in the Neisendorf case should carefully review those plans to ensure the drafting will withstand legal scrutiny. The attorneys at Simpson, Garrity & Innes, Professional Corporation can help you draft bonus plans and compensation agreements that meet your business objectives.