Court Allows Commission Claim to Proceed Despite Plan Disclaimers

Takeaway: Most commission plans include disclaimers allowing the employer to change commission amounts at any time and preventing the plan from forming a binding contract. Yet the enforceability of these disclaimers varies by state. Many courts will still allow a lawsuit for unpaid commissions to proceed despite these disclaimers.

The 7th U.S. Circuit Court of Appeals overturned a district court decision dismissing an employee’s unpaid commission claims based on disclaimers in the commission plan, finding that Illinois law recognizes that wage claims can proceed despite these disclaimers.

Each year, Tata Consultancy Services offered incentives to its sales associates of greater pay for increased sales. In April 2020, Tata invited a sales associate to participate in such a plan that was available only to outstanding salespeople. He learned through weekly calls with Tata leadership that the maximum amount he could earn under the plan was $432,040. In August 2020, Tata showed him and other salespeople a PowerPoint presentation describing plan information and pay structures.

After the associate had been working under the plan for months, Tata’s head of sales sent an email with a document that he said was the formal version of the plan—supposedly a confirmation of the information in the presentation. But this confirmation introduced critical language: Amid a list of disclaimers, Tata stated that it retained total discretion as to whether to pay the sales associates under the incentive plan and that the plan was not a contract.

By the end of the fiscal year, in March 2021, the associate had exceeded the upper sales threshold under the plan. But Tata did not pay him $432,040. Instead, it paid him $97,000. The associate asked about the discrepancy between his bonus and the plan’s maximum incentive compensation but received no explanation. In April 2022, the associate was demoted. 

The associate sued Tata and its president and head of sales. He alleged that Tata violated the Illinois Wage Payment and Collection Act (“Wage Act”) and committed the tort of unjust enrichment by failing to pay him the full bonus. He further claimed that Tata retaliated against him by demoting him after he complained about the unpaid bonus in violation of the Wage Act.

Tata moved to dismiss for failure to state a claim, which the district court granted without prejudice. The associate amended his complaint, repleading the three original claims and adding new breach of contract and fraudulent misrepresentation claims. Tata again moved to dismiss, and the district court again granted the motion. This time, the court dismissed his three repleaded claims with prejudice but gave him leave to replead his two new claims.

The associate did not exercise that leave and instead appealed his Wage Act and fraudulent misrepresentation claims to the 7th Circuit. The district court dismissed the Wage Act claim because it found that he did not plead an agreement to pay wages. The formal written plan was not an agreement, the court explained, because it included language disclaiming the existence of a contract and reserving to Tata the discretion as to whether and how much to pay its employees. In support, the court cited a handful of cases ruling that such disclaimers prevented the formation of mutual assent. The court also dismissed the new fraudulent misrepresentation claim, reasoning that the associate’s allegation amounted to “a single broken promise.” These claims, it explained, required much more—a fraudulent scheme—than the associate had alleged. 

On appeal, the 7th Circuit considered the effect of the two plan disclaimers that stated the formal plan was not a contract and that Tata would retain the discretion to decide whether to pay a bonus at all.

Regarding the first disclaimer, the court found that, under Illinois law, boilerplate disclaimers do not categorically preclude the finding of an agreement between the parties as enforceable under the Wage Act, particularly when the plaintiff has alleged a prior history between the parties of payment of commissions. Thus, the first disclaimer did not bar the associate’s Wage Act claim.

Regarding the second clause, the court found that the discretion reserved to the promisor to decide whether to pay commissions did not necessarily prevent the formation of a contract. The promisor still had a duty to exercise discretion within the limits contemplated by the parties at the time of contracting, including the implied covenant of good faith and fair dealing. 

Nevertheless, regarding the associate’s fraudulent misrepresentation claim, the court found that it could not be based on a single allegedly false promise, and thus it was properly dismissed.

The court reversed the dismissal of the associate’s Wage Act claim and remanded it to the district court for further proceedings.

Das v. Tata Consultancy Services Ltd., 7th Cir., No. 23-3209 (Oct. 4, 2024).

Jeffrey Rhodes is an attorney with McInroy, Rigby & Rhodes LLP in Arlington, Va.