First Circuit Upholds Employer’s Discretion to Reduce Commission Payments Under the Massachusetts Wage Act

Psychologist Abraham Maslow once observed, “If the only tool you have is a hammer, it is tempting to treat everything as if it were a nail.”[1] That sums up the state of commission litigation under the Massachusetts Wage Act: mandatory treble damages, attorneys’ fees, and the prospect that a court might strike a term of an agreed-upon commission plan as an unenforceable “special contract” that deprives an employee of earned wages has led to an uptick in the number of commission claims. Given these potential consequences, employees sometimes try to fit a square peg into a round hole by bringing Wage Act claims based on commissions they haven’t earned. The First Circuit’s decision in Klauber v. VMware, Inc., is one of those cases and provides employers with tools of their own to defeat similar claims.

In Klauber, a software company and salesperson agreed to a commission plan under which the salesperson did not earn commissions until he accepted the plan, he met his sales quota, and the company reconciled his commissions. During the reconciliation process, the company reviewed atypical transactions, called “Exception Transactions,” which included the top-ten largest sales in a quarter, deals that exceeded the salesperson’s quota, transactions that closed only with significant assistance from upper management, and contracts with nonstandard terms or unusual structures, and “Large Deals,” namely, any deal over $10 million. If the company determined that a deal was an Exception Transaction or a Large Deal, it could adjust a salesperson’s commission on that transaction in its “sole discretion.”    

Applying the commission plan’s Exception Transactions and Large Deals provisions, the company significantly reduced the salesperson’s commissions on two deals. While the plan contained a procedure to challenge commission reconciliation, the salesperson didn’t invoke it. Instead, he resigned and filed suit to recover his allegedly unpaid commissions.

The district court granted the company summary judgment on the salesperson’s Wage Act claim, finding that the commissions were not protected “wages” under the Wage Act. The First Circuit affirmed. It reasoned that the Wage Act applies only to commissions that are “definitely determined” (meaning arithmetically determinable) and “due and payable” (meaning the employee has satisfied all contingencies required to earn a commission). The Court then found that the salesperson could not show that his commissions were due and payable because the plan gave the company discretion to reconcile commissions on Exception Transactions and Large Deals, which described the two sales at issue. As a result, the commissions were not “wages” under the Wage Act.

In reaching that conclusion, the First Circuit rejected the salesperson’s assertion that the reconciliation provision was unenforceable because they gave the company “unfettered authority to withhold pay” by adjusting commissions. The Court reasoned that the plan limited the applicability of its reconciliation provision to Exception Transactions and Large Deals, which the salesperson conceded applied to the two sales at issue.

Similarly, the salesperson argued that the reconciliation provision was a “special contract” that impermissibly sought to exempt his commissions from the Wage Act. The First Circuit rejected that argument as putting the cart before the horse. The Wage Act prohibits special contracts that deprive employees of earned wages. Where, as was the case in Klauber, an employee had not earned a commission, the Wage Act’s prohibition on special contracts is inapplicable.

In a final salvo, the salesperson contended that the company erred when it concluded that he played only a limited role in closing one of the sales. The First Circuit dismissed that contention as irrelevant because the salesperson had not asserted a claim for breach of the implied covenant of good faith and fair dealing when applying the plan’s reconciliation provision.

Klauber provides employers with a toolkit for avoiding potential Wage Act claims under commission plans. Employers with such plans may want to consider taking the following steps: 

1. Include the completion of the reconciliation process as a condition an employee must satisfy before earning a commission.
2. Identify the transactions that will be subject to the reconciliation process.
3. Provide that the company may adjust a commission payment in its sole discretion during the reconciliation process.
4. Adopt a dispute-resolution procedure (which the First Circuit didn’t discuss in detail, but which might help reduce the risk of protracted litigation).

The Wage Act is unmistakably a hammer. But taking these steps might help make a commission plan look less like a nail.

[1] Abraham H. Maslow, The Psychology of Science: A Reconnaissance 16 (1966).