Thanks to all who came to our Labor & Employment seminar on Thursday. Our biggest crowd yet. In it, we talked about the importance of offer letters.  Marc Herman returns today with a post updating us on a recent Connecticut Supreme Court decision that came out while I was on vacation a while back that makes that point even clearer.  

hermanPicture this: Jill works for you.  You fire her as an at-will employee.  Two weeks later, you receive a letter from Jill claiming that she is owed commission for several sales that she completed prior to her termination.

What should you do?

Let’s look at her offer letter.  That it usually a good starting place.

Blah, blah, blah. . . ah, something about commission.  Let’s see what it says:

Commission is only paid once work has been performed and invoiced to the client.  Upon termination of employment, all commissions cease, except those commissions that have been invoiced to the client.

You look again at Jill’s letter and look-up her recent sales.  You realize that the commission to which she refers relates to sales that had not yet been invoiced to the client when Jill was fired.

You excitedly draft a response to Jill  – “Sorry, Jill – you’re out of luck!” (or words to that effect — your lawyer can probably help with the wording).

Jill sues you.  She argues that you owe her money.  Moreover, she argues that the commission provision is unenforceable as a matter of public policy — “you can’t deprive me of commission that I worked hard for!”

Now what?

Well, in a recent decision, the Connecticut Supreme Court concluded that provisions like the one above may be enforceable — and that employers may not have to pay a commission because of the language used in the offer letter.

In Geysen v. Securitas Security Services USA, Inc. (bearing facts very similar to Jill’s), a former employee argued that such compensation provisions are unenforceable as a matter of public policy and therefore his former employer had violated the law by not paying him commission.

The trial court agreed.

On appeal, the CT Supreme Court issued a thoughtful decision.  It made two main points:

Point One: Parties should have the freedom to make contracts with unfavorable terms.

Point Two:  You cannot draft a contract that simply tries to work-around the law.  They violate public policy — A big no-no.

So what about provisions like the one above?

The easiest answer is that such provisions should pass legal muster.  Sure, it may contain terms that favor the employer, but that’s ok because the parties bargained for it.  Nor is it a work-around the law; the law simply requires that employers pay employees in accordance with any agreement.

After concluding that the provision was enforceable, the Court read it literally: no commission due.  The Plaintiff’s hard work aside, he had previously agreed that no commission would be “due” prior to the client being invoiced.

The Court also agreed with the defendant-employer that the employee’s claim of wrongful discharge (as a matter of public policy) was also without merit.  No violation of public policy and therefore no wrongful discharge.

Note, however: the Court left open the possibility that such practices could amount to a breach of the implied covenant of good faith and fair dealing.  This really concerns the employer’s motive.

For example, an employer’s motive for firing an employee was simply to avoid paying commission, that would be a breach of the implied covenant of good faith.

What’s the lesson here? Agreements with employees are not unenforceable simply because they may seem unfair to the employee.  However, apply caution in drafting agreements that seek to work-around the law.

Freedom of contract is alive and well. . . for now.

Back from a long holiday weekend, my colleague Chris Parkin this morning takes a look at a new Connecticut Appellate Court case about employee compensation.  

A new case that will be officially released tomorrow reminds employers to take care with their words and promises when it comes to employee compensation.

The facts of the case are fairly straightforward:

A 20-year employee for a major financial firm had been rewarded handsomely with generous six-figure bonuses that typically exceeded his annual base pay.  The financial crisis hit the employer hard.  Bonuses paid in early 2008 were down appreciably compared to prior years.  By 2009, the employer had been infused with cash from the United Kingdom government to maintain stability.

The tenuous financial position caused the employer to alter its bonus system.  In January 2009, bonus eligible employees were advised that they would be subject to a “deferral program.”  This program called for the bonuses to be paid as bonds with vesting dates over a three year period.  The full amount of the bond would only be owed if the employee was still employed by the employer at the end of the three year term.

The employee resigned before the first vesting date and the employer determined that he forfeited his right to payment on the bonus bond. The employee sued, alleging that he was entitled to his bonus as a matter of contract.

Who wins?

The lower court said that there was no contractual obligation to pay a bonus because the employee was never guaranteed a bonus but rather was simply eligible for one in the discretion of his employer.

On appeal, the Appellate Court agreed, noting that while, “all employer-employee relationships not governed by express contracts involve some type of implied contract of employment,” there was no contractual obligation to pay a bonus here.

The Court’s analysis in Burns v. RBS Securities, Inc. (download here).  hinged on the fact that no evidence was introduced to suggest that the employee was ever guaranteed a bonus.  His supervisor testified that the employee had only been told he was “eligible” for a bonus and the employee handbook clearly conditioned the payment of any bonus on discretionary factors including the health of the company.  There was also undisputed evidence that the financial health of the employer was “abysmal” at the time.

The one argument available to the employee was that he was entitled to the bonus because an implied obligation arose over the course of years of generous annual bonus payments.  The court flatly rejected this argument noting that “the mere practice or custom of an employer does not, by itself, create a contractual obligation.”

This decision is, of course, good news for employers who are careful not to make promises about bonus payments.  Managers should be trained not to make any promises about bonuses unless there is absolute certainty that the company will make such payments.  Handbooks should similarly be drafted to prevent the creation of an implied contract to pay a bonus.

The Appellate Court underscored this advice by distinguishing another matter, Ziotas v. Reardon Law Firm, P.C. (which was covered here back in 2010).  In Ziotas, the court said the employer was obligated to pay a bonus because it made a verbal promise that “this has been a very successful year for the firm, and for you, and… you’re going to get a bonus that fairly reflects that.”

It may not sound like much, but the difference between, “you’re getting a bonus” and “you’re eligible for a bonus” could be costly.

Connecticut is an at-will employment state, meaning that employers can terminate an employee’s employment for any reason at any time, with or without cause. Employees are also free to leave their jobs at any times.   There are exceptions, of course, to that general rule.  But overall, when an employer’s offer letter to an employee confirms that the employee is "at-will", that should do it. 

However, some employers — while contending that they are keeping the at-will status — have language in their handbooks that suggests that the first 90 days of employment are "probationary." 

A decision by U.S. District Court Judge Mark Kravitz released late yesterday in Defontes v. Mayflower Inn suggests that this language could potentially turn an at-will employee into something else. I use "potentially" because the court does not conclude this definitively; rather, the court suggests that this is an issue for a jury — not a court — to decide.

The District Court, in denying a motion for summary judgment by the Mayflower Inn, found that it was a disputed issue whether the handbook provisions changed an employee’s at-will status into something else.  The Court did not conclude that the handbook did, in fact, make definite promises to the employees — only that it could not decide that issue in the absence of a jury trial. 

It is not at all clear what the Handbook promised the Inn’s employees. For example, does the use of the term "Probationary-At-Will Period" imply that after 90 days an employee is no longer at will? It is undisputed that [the employee] worked at the Inn for more than 90 days. Did he then become something other than an at-will employee? Was he, at a minimum,
entitled to a performance review before termination? It is undisputed that [the employee] was summarily fired without any explanation of the reasons for his termination or whether his performance was inadequate in any way. Given the ambiguity of the Handbook language (coupled with the fact that no party has provided the Court with any evidence regarding the Inn’s course of performance under it), the question of whether the Handbook gives rise to an implied promise that after 90 days employment will not be terminated without cause, is one for a jury, not this Court. As the Connecticut Supreme Court stated in Gaudio, "In the absence of [express contractual] language . . . the determination of what the parties intended to encompass in their contractual commitments is a question of the intention of the parties, and an inference of fact. Because it is an inference of fact, determining the intent of the parties is within the province of the jury . . . ."

Could the employer have done more to prevent this claim? Monday-morning quarterbacking on cases like this is easy so I’ll resist the urge and leave it to you, as readers, to analyze the court’s decision. (I would suggest, however, that you ponder the decision it over a meal at the Mayflower Inn, which was written up by the Hartford Courant just last week or so.) 

What I take away from the case are lessons that are applicable for all sorts of employers, such as:  

  • Updating an employee handbook. I previously discussed the need for vigilance at this earlier post. 
  • Ensuring that a handbook has an appropriate disclaimer that the policies do not change an employee’s at-will status.
  • Consider eliminating the "probationary" period language for the "introductory" period of employment. Instead, consider adding that an employee’s performance will be reviewed after 90 days. If an employee’s employment needs to be terminated, that will be an opportune time — with or without a "probationary" period. After all, if an employee is at-will, then they can be terminated without necessarily being on "probation". 
  • Ensuring that the employee not only receives the handbook but signs an acknowledgment of receipt.

While this list is not intended to be exhaustive, updating policies and procedures may be one of the easiest ways for an employer to reduce their exposure to liability. Cases such as this one show the importance of doing so.