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.

The U.S. Supreme Court this morning ruled, 5-4, that pharmaceutical representatives are “outside salesmen” under the Fair Labor Standards Act.  In plain English, this now means that those representatives are now considered exempt from overtime.

Supreme Court

This decision is a big victory for pharmaceutical companies who have been facing years of class action suits (some of which settled in a very high profile manner).  For background on the subject, you can see my prior posts here and here.

You can download the decision in Christopher v. SmithKline Beecham Corp. here.

The decision split along familiar ideological lines with Justice Kennedy casting the decisive vote in favor. 

The first part of the decision rests on whether the Department of Labor’s position on the subject requires deference. The Court concludes that it does not because of the agency’s shifting (and unpersuasive) reasons. 

In looking at the text of the statute itself, the court suggests that “The statute’s emphasis on the “capacity” of the employee counsels in favor of a functional, rather than a formal, inquiry, one that views an employee’s responsibilities in the context of the particular industry in which the employee works.”

Ultimately, the court concludes that “petitioners made sales for purposes of the FLSA and therefore are exempt outside salesmen within the meaning of the DOL’s regulations. Obtaining a nonbinding commitment from a physician to prescribe one of respondent’s drugs is the most that petitioners were able to do to ensure the eventual disposition of the products that [the company] sells.”

The pharaceutical representative position here is fairly unique so it remains to be seen whether this decision will have any dramatic impact outside the pharaceutical industry, but at the very least, those companies should be breathing a big sigh of relief today.

The bill's anti-retaliation provisions appear to apply to all "employees".

The U.S. Supreme Court yesterday heard arguments over whether pharmaceutical sales reprsentatives were properly classified as exempt (from overtime) because they fall within the “outside sales” exemption of the nation’s wage & hour laws.

The plaintiffs said that they were not properly classified because, while the representatives do a lot of tasks, the one thing that they don’t do is actual “sales”.   Rather, they encourage doctors to write prescriptions for their patients to buy their company’s drugs.

You can read the entire transcript here and, as always, check out the excellent SCOTUSBlog for further details.     

The New York Times reported that a number of justices (including the “liberal” ones) expressed some skepticism with the employees’ arguments.   

Justice Ruth Bader Ginsburg suggested that focusing solely on whether there were sales was a mistake. She said the representatives had striking autonomy.

“They don’t clock in and out,” she said. “They work outside the workplace. After they’re trained, they have minimal supervision.”

“It includes dinners,” she said to the plaintiffs’ lawyer, Thomas C. Goldstein. “It may be conventions. Entertainment. Maybe golf. If you’re right, would the time on the golf course get time and a half?”

I’ve previously covered this topic in some prior posts here and here

The transcript makes for interesting reading. In one instance, the government’s lawyer noted something that hadn’t been discussed before– that the Department of Labor was asked for an opinion back in 2007 about the practice.  It didn’t provide one.

JUSTICE SOTOMAYOR: I saw in the briefing hundreds of opinion letters by hundreds of different industries. Outside of this 1945 letter, did anybody else, any other pharmaceutical company, ever set out for the government or seek an opinion letter that you’re aware of?

MR. STEWART: I’m aware of only one instance. I think this is not a matter of public record, but there was one request in, I believe, December of 2007, for an opinion to the effect that the detailers [pharmaceutical sales representatives] were covered by the outside salesman exemption. DOL never responded one way or the other.

A decision is expected by late June 2012.

My colleague, Joshua Hawks-Ladds, has this post regarding an important new case that further explains the breadth of the preemption effect of the Federal Arbitration Act, a case he handled on behalf of our client, Ulti-Mate Connector, Inc. 

Last week was a watershed moment for arbitration preemption cases, both at the federal and state level. As highlighted in an earlier post, the U.S. Supreme Court ruled in AT&T Mobility v. Concepcion that the Federal Arbitration Act preempts state laws that limit arbitration agreements that proscribe class action arbitration procedures

Earlier in the week, a Superior Court decision which Pullman & Comley successfully litigated, held that the Connecticut Sales Representative’s Commissions Statute, C.G.S. §42-481 et seq., is also preempted by the Federal Arbitration Act.  That case, Avionics Technologies, Inc. v. Ulti-Mate Connector, Inc., can be downloaded here. 

Avionics is a Connecticut-based sales representative that sued Ulti-Mate for the payment of allegedly unpaid commissions. Ulti-Mate is a California corporation. Avionics was Ulti-Mate’s eastern United States’ sales representative. 

Avionics and Ulti-Mate entered into two manufacturer’s representative agreements, one in 2004 and one in 2006, both of which provided for arbitration of any dispute in California, with California law applying. 

Avionics brought suit in the Connecticut Superior Court under the state’s Sales Representative’s Commission Statute, which provides that “any provision in a contract between a sales representative and a principle that provides for waiver of any provision of §§42-482 and 42-483 (of the Sales Commission Statute) shall be void.” C.G.S. §42-484(a). Section 42-482(b) provides for the right of a sales representative to recover “in a civil action. . . twice the full amount of the commission owed to such sales representative.” 

Avionics argued that the Commission Statute trumped the arbitration agreements and permitted the lawsuit against Ulti-Mate to go forward in the Connecticut Superior Court.

Ulti-Mate moved to compel arbitration in California pursuant to the Federal Arbitration Act (FAA), 9 U.S.C. §2, which provides that any contract involving interstate commerce and containing a written provision agreeing to submit a controversy to arbitration “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. §2. 

The Superior Court discussed the strong policy favoring arbitration both in Connecticut and California, as well as the strong national policy (as demonstrated by the AT&T case) and also cited Second Circuit and Supreme Court precedent which declares that “the FAA preempts all state laws that impermissibly burden arbitration agreements.” 

The Superior Court stated that “to the extent the Connecticut Sales Representatives Commission Statute conflicts with the FAA, the supremacy clause of the Constitution results in state law being rendered preempted and unenforceable.” 

Thus, in a case of first impression in Connecticut, and the first case that this author is aware of discussing the Connecticut Sales Representative Commission Statute, a Superior Court judge has determined that the FAA preempts that statute when it conflicts with a bona fide arbitration agreement.

The Court in the Avionics case also discussed the defenses to the arbitration agreement that are available to defeat the arbitration agreement (which would have avoided preemption), including unconscionability and all the other standard contract defenses), however, the Court rejected those arguments in this case, finding that the arbitration agreement was valid and enforceable.

For employers, this case and the AT&T case continue to reinforce the importance of arbitration provisions if desired. 

For employers who are situated along the Connecticut-New York state line, keeping updated on the employment developments in both states is a challenging endeavor.  This is particularly true if the company’s sales force or business is dependent on servicing both areas.

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Connecticut employers with New York employees, should be aware of a number of recent amendments to New York Labor and Executive Laws.  These include:

(1) the requirement of a written agreement with commissioned salespersons;

(2) a change in the wage threshold for certain exempt employees;

(3) increased monetary fines for meal and rest period violations;

(4) leave for blood donors; and,

(5) narrowed criminal conviction inquiry.

My fellow EBG colleagues have prepared an excellent summary of these changes in an alert posted yesterday. 

For many employers, the new law on commissioned employees will be the most significant. The provision applies to all salespersons whose earnings are based, in whole or in part, on commissions from merchandise, real estate, insurance, securities, and other products or services.  As my colleagues have stated, the new law now states:

  • The employer and the commission salesperson must enter into a written document describing the terms of employment.
  • The document must be signed by both the employer and the employee.
  • The written document must describe how the wages, salary, commissions, draw-against commissions, if any, and all other monies earned and payable are calculated.
  • The frequency of reconciliation should also be included, if the agreement provides for a recoverable draw.
  • The document must also describe how commissions are paid upon termination of employment.
  • The document must also be kept on file by the employer for at least three years. 

It is easy to confuse the differences between the two states’ laws. For human resources professionals, its best to keep a running list of the applicable laws that may apply for certain issues.