Texas Supreme Court Clarifies Standard for Payment of Commissions When Agreement Is Silent

For many years, an oft-litigated question concerned whether a former employee was owed the commissions on sales made prior to the employee's discharge from employment. Sometimes employment agreements were clear on the issue, such as by providing unambiguously that commissions would be paid when the employer received payment for a completed sale. Frequently, however, employment agreements were less than clear as to when commissions would be paid to former employees. Over the years, courts ruled in different ways and applied different standards when determining whether a former employee was entitled to commissions on sales made prior to an employment termination. On May 20, in Perthuis v. Baylor Miraca Genetics Laboratories LLC, the Supreme Court of Texas clarified the standard to be applied in those situations.

Background

The plaintiff was vice president of sales and marketing for Baylor Miraca Genetics Laboratories. In early 2015, the company drafted, and the plaintiff signed without alteration, a two-page employment agreement that provided the following: "Your commission will be 3.5 percent of your net sales." The agreement contained no other explanation concerning the commission arrangement.

In January 2017, the plaintiff completed negotiations on an amendment to a sales contract with a prominent client, making the contract the largest of its kind in the company's history. The company terminated the plaintiff's employment on Jan. 23, 2017. The next day, the client signed the contract amendment that the plaintiff had negotiated. The company did not pay the plaintiff any commission on the amended contract.

The plaintiff sued, seeking payment of the unpaid commissions from the contract. A jury found for the plaintiff on all claims, but it did not award him the full amount he sought. The trial court judge had instructed the jury on the "procuring-cause doctrine." Under this rule of Texas contract law, the plaintiff would be entitled to the commissions if he was the "procuring cause" of the sales; that is, if he was the but-for cause of the sales involved. Both the company and the plaintiff appealed. The appellate court held that the procuring-cause doctrine did not apply and reversed the judgment for the plaintiff. The appellate court determined that the employment agreement unambiguously entitled the plaintiff to commissions only for sales made during his employment.

The Supreme Court of Texas's Analysis

The Supreme Court of Texas reversed the appellate court's decision, holding that in the absence of specific language delineating the terms of payment in a commission agreement, the procuring-cause doctrine controls. In so holding, the Supreme Court of Texas relied on a decision from 1916 that had adopted the procuring-cause doctrine in cases involving commissions owed to brokers in real-estate sales.

The Texas high court indicated that parties are free to specify in an agreement whatever they want concerning when commissions are earned and paid, but in the absence of any language addressing the timing and entitlement to commissions, the procuring-cause doctrine applies. Under this standard, an employee will be entitled to a commission on sales, even after his or her employment is terminated, if the employee is the proximate and but-for cause of the specific sales.

Key Takeaways

The Supreme Court of Texas's decision provides clarity concerning situations where an employment agreement is not clear as to when a commission is earned or whether it will be paid after the termination of employment. The high court's decision specifically provides that the "procuring-cause doctrine" is the default standard to be used when commission agreements are silent concerning when commissions are earned or due. The decision also establishes that the employer and employee are free to establish their own guidelines concerning the payment of commissions. One lesson from this decision for Texas employers concerns the importance of clearly articulating in an agreement with a commissioned employee when a commission will or will not be paid (e.g., commissions will be paid only if the employee is still employed at the time of scheduled payment).

Lawrence D. Smith is an attorney with Ogletree Deakins in San Antonio. © 2022 Ogletree Deakins. All rights reserved. Reposted with permission.