Texas Supreme Court Clarifies Standard for Payment of Commissions When an Employment 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, 2022, in Perthuis v. Baylor Miraca Genetics Laboratories, LLC, the Supreme Court of Texas clarified the standard to be applied in those situations.

Background

Thomas Brandon Perthuis was vice president of sales and marketing for Baylor Miraca Genetics Laboratories. In early 2015, the company drafted, and Perthuis signed without alteration, a two-page employment agreement that provided the following: “Your commission will be 3.5% of your net sales.” The agreement contained no other explanation concerning the commission arrangement. In January 2017, Perthuis 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 Perthuis’s employment on January 23, 2017. The next day, the client signed the contract amendment that Perthuis had negotiated. The company did not pay Perthuis any commission on the amended contract.

Perthuis sued, seeking payment of the unpaid commissions from the contract. A jury found for Perthuis 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, Perthuis 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 Perthuis appealed. The appellate court held that the procuring-cause doctrine did not apply and reversed the judgment for Perthuis. The appellate court determined that the employment agreement unambiguously entitled Perthuis 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 utilized 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).

Ogletree Deakins will continue to monitor Texas employment law developments and will post updates on the firm’s Texas and Wage and Hour blogs. Important information for employers is also available via the firm’s webinar and podcast programs.