Why it matters

Interpreting California and New York law, the Seventh Circuit Court of Appeals ruled that negative sales growth is a permissible way to decrease an employee's commissions. A pair of sales reps sued Medline Industries, Inc. over the employer's method of calculating commissions, which included year-to-year sales declines as a factor. The plaintiffs argued that instead of being reduced, their commissions should be zeroed out for such years, especially because the decline could be due to factors outside their control. But the federal appellate panel sided with the employer, finding that Medline's calculation was "a valid means of incentivizing their salespeople to grow business year over year in their assigned territories" pursuant to both California and New York law, where the two plaintiffs were located. The parties had contractually agreed Medline "could use both the carrot and the stick in promoting growth," the court noted, affirming summary judgment for the employer.

Detailed discussion

David Cohan and Susan Schardt worked as sales representatives for Medline Industries, a national manufacturer and distributor of healthcare supplies, in New York and California, respectively. Both received a base salary as well as commissions on sales of products to accounts within their assigned territory pursuant to the terms of written employment agreements.

Medline calculated commissions by starting with the salesperson's invoiced sales for the current month and subtracting their sales from the same month in the prior year. Depending on whether the salesperson sold more or less than in the year prior, that calculation could result in a positive or negative sales growth number. Medline then multiplied the salesperson's growth or decline by a commission percentage. The calculation always included all of the sales rep's business, including accounts with positive and negative sales growth.

Cohan and Schardt filed a putative class action against their employer, claiming that Medline's practice of accounting for year-to-year sales declines in calculating and paying commissions was impermissible under the terms of their employment agreements and state wage laws. Employees should simply not have earned commissions when they failed to grow sales year over year, the plaintiffs contended, with negative growth zeroed out. A district court judge disagreed, granting Medline's motion for summary judgment. A panel of the Seventh Circuit Court of Appeals affirmed.

The court rejected the plaintiffs' argument that the term "negative growth" is an oxymoron inconsistent with the plain language of the employment agreements and that the term "growth" should have been interpreted in the light most favorable to them at the summary judgment stage. The compensation plans provided by Medline as part of the employment agreements "clearly and unambiguously" explained how commissions were to be calculated and the positive examples used did not mean negative growth was not included, the panel said.

As for state law, the Seventh Circuit found that Medline's accounting for negative growth was not a deduction from earned commissions—which would have run afoul of both California and New York law—but "rather the contracted-to means of calculating commissions."

New York's highest court has held that state law does not bar employers from structuring payment arrangements that include a "downward adjustment" in calculating commissions, the panel said, while California courts "have long recognized, and enforced, commission plans agreed to between employer and employee, applying fundamental contract principles to determine whether a salesperson has, or has not, earned a commission."

The court considered the plaintiffs' position that Medline's commission structure violated state law because it impermissibly recouped business losses from sales reps even when the losses are outside employees' control, such as natural disasters or if sales had already been in decline before the employee was assigned to the territory. But "the agreement between the parties specifies that commissions are earned in the first instance based on sales growth, including negative growth," the panel wrote. Moreover, the employment agreement also provided for the flip side: sales representatives received commissions from sales in their territory "irrespective" of whether they made the sale—meaning they could earn money even where they didn't make a sale.

Affirming summary judgment for Medline, the Seventh Circuit concluded the employer's commission calculation was "a valid means of incentivizing their salespeople to grow business year over year in their assigned territories."

To read the decision in Cohan v. Medline Industries, Inc., click here.