When Is A Promise Not A Promise?

It is not uncommon for an employment agreement for a sales person to including language that, “Employer reserves the right to amend or terminate this agreement at any time and for any reason.” Such “reservation-of-rights” provisions are common in sales representative agreements where the representative is compensated at least in part by commission payments.

Employees and their counsel typically dislike these provisions, which are usually included in an agreement offered on a “take it or leave it” basis. However, a recent Ohio case provides hope for employees in such situations. Such provisions, rather than protecting employers, may backfire, exposing the company to the risk of being held liable for even greater compensation.

In analyzing such contracts and provisions, it is helpful to review a couple of basic contract law concepts. Contracts between an employee and an employer are “bilateral,” which means nothing more than that there are two parties to the contract, each of whom makes certain promises to the other. The sales representative promises to solicit purchase orders; the principal promises to pay a commission on such orders. The mutual promises of the principal and the sales representative form what the law calls “consideration.” Although the law does not attempt to value the consideration, some consideration from each party is required. Typically, the consideration is sufficient if each party promises to do something, or not to do something it would otherwise be permitted to do.

In the context of reservation-of-rights provisions, what has the employer promised to do if it agrees to pay certain compensation, but then reserves the right to amend or terminate the agreement at any time and for any reason? One possible answer is that the employer has agreed to absolutely nothing!

This is precisely the conclusion reached by the Ohio Court of Appeals in the recent Quesnell case. After the employee brought in new accounts worth over $1 million and it became apparent that the employer would be required to make large payments to her under an incentive plan, the employer unilaterally changed the plan to reduce the required payments. In the employee’s lawsuit, she argued that it was simply not fair for the employer to change the terms of the plan after she secured significant new business in reliance on the original incentive plan. She therefore asserted that she was entitled to be paid under the terms of the original plan.

The employer, on the other hand, relied on the reservation-of-rights provision, saying it had the right to change the agreement whenever it wanted. The employee responded that the employer’s alleged right to change the agreement at any time made its promises “illusory” – there was really was no promise at all. Furthermore, without consideration, the original contract was unenforceable.

The court agreed, holding that a contract is illusory when one party retains an unlimited right to determine the nature or extent of its own performance. However, once the court determined that the contract lacked consideration, it threw out the original contract, and with it, the employee’s right to seek payment thereunder.

How then could the employee proceed? The court held that she could pursue a claim for equitable relief under a theory of unjust enrichment – the principle that one party cannot receive benefits at the expense of another without paying just compensation. In other words, it would be unfair to permit the employer to retain a benefit – the value of the sales – without paying fair compensation to the employee. An employee seeking to recover under this theory must prove that (1) he or she conferred a benefit upon the employer, (2) the employer had knowledge of the benefit, and (3) it would be unjust for the employer to retain the benefit without payment.

The related equitable theory of quantum meruit allows a party to recover the reasonable value of the service provided if the circumstances are such that the other party knew or should have known that the plaintiff expected to be paid the reasonable value of that service.

In Quesnell, the court found that the employee had conferred a benefit upon her employer by bringing in the new accounts. It rejected the company’s argument that it had compensated the employee fairly by paying her base salary and thus was not unjustly enriched. The court noted that the employee’s base salary was separate and distinct from incentive compensation, and it sent the case back to the trial court for determination of the amount of additional compensation to which the employee was entitled under the above equitable doctrines.

Because of the remand to the trial court, the appeals court did not address the question of how the employee should be compensated fairly for her services. (Since the contract was rendered illusory by the employer’s retraction of its promise, the determination of compensation was not necessarily limited by the commission rates in the employment agreement; that issue will typically be left for a jury to decide.) Nor is an employer necessarily protected from paying compensation in addition to the salary and commissions already paid.

In Quesnell, we are left to speculate about how a jury might react to evidence that the employee conferred a benefit of over $100 million to her company, only to be paid $60,000 in compensation. If the industry standard was for a 25% commission on sales, the employer would face significant risks and liability.

These principles may also apply where a sales representative is terminated on the eve of receipt of a large order, where the employment agreement states that commission will be paid only on orders accepted during the period of employment. Under the above equitable theories, the representative may be entitled to commissions on the order if he or she was the “procuring cause” of the order.

Nicole Lundrigan is a member of the  firm’s Litigation Department with  an emphasis on employment law, non-competition agreements, and  commercial litigation. To learn on how  you or your company can best protect  itself when entering into employment  contracts, please feel free to contact  Nicole at (513) 629-9791.

This entry was posted in Labor | Employment, Published Articles, Volume 11, Issue 2