Oral Contract Upheld in California Despite Offer Letter Purporting to Supersede It

Does an employment offer letter that expressly supersedes any oral statements on the part of supervisors concerning conditions of employment preclude verbal wage promises made after the employee is hired? Chen v. M&C Hotel Interest, Inc., No. B266461 (August 11, 2017).  

On August 11, 2017, the California Second District Court of Appeal issued an opinion upholding a trial court’s determination that an oral contract existed between Jackie Chen and her employer, M&C Hotel Interest, Inc., the owner of the Millennium Biltmore Hotel in downtown Los Angeles. It also found that the commission Chen’s supervisor promised her during the time period when she was employed by M&C Hotel fell within the definition of “wages,” entitling her to an award of reasonable attorneys’ fees under the California Labor Code. Further, the court found that she was entitled to commissions after she resigned from employment.

Background

M&C Hotel’s September 2010 employment offer letter to Chen for a position as the Director of Central Procurement for the United States region stated the following: “Please note that any oral statements on the part of supervisors, managers, or other employees of [defendant] concerning conditions of employment are superseded by the terms of this letter.” Chen accepted the written job offer, which did not include any commission for room sales.

During her employment with M&C Hotel, Chen alleges that she and her employer had entered into an oral contract that would compensate her five percent commission on the total revenue of any hotel room sales. Chen obtained such a sale between China Southern Airlines and the Biltmore Hotel.

In July of 2011, Chen’s boss, the Director of Central Procurement for the United States region, met with her and requested that she seek room sales, specifically with Chinese businesses. Chen’s boss told her that because sales were not part of her regular job, she would earn additional compensation: the current industry standard on commissions for room sales, which was about five percent for groups with discounts. 

On October 28, 2011, the general manager of the Biltmore Hotel signed a memorandum of understanding agreeing to room sales with China Southern Airlines.

In early November of 2011, Chen’s boss met with the general manager and with the financial controller of the Biltmore Hotel to discuss Chen’s commission for obtaining the China Southern Airlines  room sale agreement. Her boss understood her commission to be five percent for “everything she brings in” for an industry-standard period of three years.

Chen continued working to get China Southern Airlines to sign a final contract. An estimated 80 percent of the work on this project occurred after the Biltmore Hotel signed the initial memorandum of understanding in October of 2011. The Biltmore Hotel and China Southern Airlines eventually entered into the room agreement, renewing the agreement several times.

In February of 2013, Chen sent her 2012 production report via e-mail to the financial controller of the Biltmore Hotel requesting commission for room sales, but M&C Hotel did not pay the commissions allegedly due.

In June of 2013, Chen resigned from her position with M&C Hotel. Afterwards, human resources responded to her written requests for commission payment, asserting that the Biltmore Hotel had a policy of not paying commission on such room sales, claiming that Chen was told this policy repeatedly, and further stating that M&C Hotel did not pay commissions on future sales to individuals who were no longer employed by the company.

Court Decision

The court of appeal ruled in Chen’s favor. M&C Hotel argued that its September 2010 offer letter should supersede any subsequent oral terms and also that the alleged verbal agreement was an invalid modification of the written offer. The court found that the offer letter stated that oral terms “are superseded by the terms of this letter” but that this referred to any oral statements in existence at the time Chen entered into employment. Also, the court found that the five percent commission arrangement was independent and collateral because it was supported by new consideration, namely new compensation, and it concerned extra sales duties.

With respect to the post-judgment award of attorneys’ fees, M&C Hotel appealed the trial court’s award of attorneys’ fees to Chen, arguing that the trial court should not have awarded attorney fees at all because Chen had sued for contract breach initially. Chen appealed the amount of the award, contending that the trial court erred in its calculation of her attorneys’ fees. 

The court of appeal rejected M&C Hotel’s appeal of the award of attorneys’ fees. The court  upheld the finding of the trial court that Chen’s commissions were “wages” under the California Labor Code, and thus that she was entitled to reasonable attorney’s fees, even though she initially had sued for contract breach, not nonpayment of wages. The court found that Chen did not initially have to plead a California Labor Code claim in the original complaint in order to qualify for attorneys’ fees under the Labor Code because the complaint always sought the recovery of what was construed to be unpaid wages.

The court of appeal reversed the trial court’s ruling that Chen’s wages under the Labor Code accrued only during the time period when she was employed by M&C Hotel, pointing out that in the “context of commissions on sales, it has long been the rule that termination (whether voluntary or involuntary) does not necessarily impede an employee’s right to receive a commission where no other action is required on the part of the employee to complete the sale leading to the commission payment.” As the court of appeal notes, Chen earned the commission when China Southern Airlines entered into the room agreement with the Biltmore Hotel in October of 2011. The decision cites this familiar concept: “He who shakes the tree is the one to gather the fruit.” Because there was nothing else for Chen to do “to complete the sale leading to the commission payment,” Chen’s entire commission from the room sales agreement constituted “wages” under the labor code for the entire term of the oral contract, regardless of continuation of her employment with M&C Hotel.

Finally, the court of appeal reversed the calculation of Chen’s attorneys’ fees. The court of appeal specified that the attorneys’ fees award must take into consideration the actual time spent by Chen’s attorney on the prevailing claim, whereas the trial court had reduced the lodestar value to 23 percent because of its view that only the amount earned while Chen was employed by M&C Hotel could be characterized as a “wage claim.” The court of appeal clarified that Chen was entitled to commission for the entire term of the oral contract once the work to procure the agreement and the sale had been completed, and thus the attorneys’ fees should be recalculated to account for all the legal work on the prevailing claim.

Key Takeaways

Employers should consider reviewing their offer letters to employees periodically and revising or clarifying in a new writing as necessary to eliminate any unwanted narrow limitations. In addition:

• Watch out for present tense and narrow limitations purporting to preclude verbal modifications to the terms of employment.  
• Consider including a broadly-worded statement explaining that oral statements, representations, conduct, and practices of officers or employees of the company will not modify or change the terms of employment.
• Consider training managers and supervisors not to enter into oral commission compensation agreements.