This blog has stressed (most recently here and here) the importance of carefully drafting incentive compensations plans to avoid unintentionally converting incentive compensation into earned “wages” protected under state law. Another recent decision, this one from the Court of Appeals for the Seventh Circuit reinforces the employer benefits of careful drafting. Lawson v. Sun Microsystems, Inc., 2015 U.S. App. LEXIS 11201 (7th Cir. June 30, 2015).

In Lawson, Plaintiff, a commissioned sales employee, sought commission under his employer’s 2005 incentive plan for a sale he negotiated in 2005 and closed in March 2006. Plaintiff urged that the terms of the 2005 incentive plan entitled him to approximately $1.8 million in commission. According to that plan’s terms, commissions were payable thereunder on all sales which were invoiced during the 2005 fiscal year (January through December), and the plan would remain in effect until a subsequent plan or amendment became effective. On August 31, 2005, Defendant acquired Plaintiff’s former employer, and effective September 1, 2005, amended the incentive plan by setting December 25, 2005 as the date the 2005 incentive plan would terminate. On March 17, 2006, one day after Plaintiff closed the sale at issue, Defendants circulated the 2006 incentive plan, which was dated March 13, 2006 and made retroactive to December 26, 2005, consistent with the September 1, 2005 amendment. Under the terms of the 2006 incentive plan, Plaintiff was entitled to $54,300 for the sale he closed in March 2006.

In seeking payment of the higher commission, Plaintiff agued the terms of the incentive plans were ambiguous insofar as the original text of the 2005 incentive plan stated the plan would remain in effect until a subsequent plan or amendment became effective, while the September 1, 2005 amendment set a fixed date for the expiration of the incentive plan. Therefore, Plaintiff argued extrinsic evidence should be admitted to demonstrate that the 2005 incentive plan was intended to remain in effect through March 2006 when the new plan finally was distributed. Further, Plaintiff argued because the business did not transmit the 2006 plan until after Plaintiff finalized the sale, he was entitled to commissions under the 2005 plan. The Court rejected both arguments. Specifically, the Court concluded that the 2005 incentive plan, as amended, clearly and unambiguously foreclosed Plaintiff’s ability under such plan to collect commissions on sales which were not completed by December 25, 2005. Plaintiff’s argument could not be reconciled with the plain language of the incentive plan.

Employers should review their incentive compensations plans to ensure the terms of the plans are clear and unambiguous, and maximize employer discretion where appropriate. Of course, employers also should endeavor to issue plans prior to the covered performance period to limit equitable arguments.