Sales Commissions Cap

As a sales representative for a computer software company, Richard received an annual salary and sales commissions as determined by a compensation plan that was part of his contract. There was a specific formula for how commissions were to be calculated, but language in the plan gave the company broad authority to make a final decision about compensation and to change the plan at any time. For sales commissions, in particular, the employer reserved the right to review any transaction generating a commission beyond a salesman’s annual quota and to determine the “appropriate treatment” of it.

When Richard scored an especially large sale, the company decided that its “appropriate treatment” was to cap Richard’s commission at an amount that was less than he expected under the usual formula. The company’s position was that the large commission expected by Richard was not justified because it arose from a single transaction on which Richard had not done as much work as he claimed, and because he had only been employed by the company for eight months. Richard quit and sued for breach of contract.

A federal court ruled in favor of the employer. The language in the compensation plan was broad, but it was not ambiguous. The whole thrust of the document was to leave determination of the commissions to the employer’s discretion, notwithstanding that the plan identified some forms of appropriate treatment of commissions.

When a contract leaves a decision up to one party’s discretion, it is nearly unassailable in court. A court may intervene if that party is guilty of fraud, bad faith, or a grossly mistaken exercise of judgment, but Richard did not make those arguments. Despite the fact that it was arguably unfair, the court ruled that such a decision was “out of our reach.”

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