Employer Cannot Unilaterally Reduce Promised Commission Rates -- McCaskey v. California State Automobile Association

When an employer reserves the right to modify or amend a sales commission plan it create a dangerous conflict of interest with the sales person.  This is especially true where the employer believes it has the ability to unilaterally modify the terms of the agreement even after the employee has already performed his end of the bargain.  

In McClaskey v. California State Automobile Association, the California Appellate Court has clarified that under certain conditions a commission contract may become "vested" so that its benefits cannot be unilaterally reduced.   

The California State Automobile Association (CSAA), promised McClaskey and other insurance salesmen that if they had worked for the company for at least 15 years their minimum sales quotas would be reduced by 15% when they reached age 55.  After each of the plaintiffs had met the conditions for this "relaxed commission" benefit, the employer decided to rescind it.  Each of the plaintiffs was subsequently fired for either failing to meet the regular quota or for refusing to sign a new contract that waived this provision.

First, the Court rejected the employer's theory that it could not be required to honor its promise forever and must therefore be allowed to rescind it so long as the policy had been in effect for a "reasonable time."  Assuming arguendo that this theory was valid in the first place, the Court held that the "reasonableness" of any time limit for modification must be judged from the perspective of whether the employee has had time to receive a fair exchange in return for his performance.

Determining what constituted a reasonable time under the circumstances would seem to require consideration of the facts we have already noted, i.e., that the benefit is readily understood as a way to ease plaintiffs into retirement, that plaintiffs had in fact devoted their careers to CSAA's service in anticipation of the benefit, and that CSAA had therefore received everything it bargained for while yielding nothing whatever in return.  So understood, it would seem patently unreasonable to refuse the promised benefit when CSAA did.     

Next, the Court rejected the argument that an employer has carte blanche to do anything it likes merely because the employment relationship is generally terminable "at-will."

It may indeed be true, and can in any event be assumed for present purposes, that the employment was “at will” in the sense that CSAA was generally entitled to discharge plaintiffs without having to establish good cause to do so. It does not follow, however, that it could discharge them-as it explicitly did-for failing to meet production quotas after they had qualified for the promised reductions, or for refusing to relinquish the right to those reductions. The governing question is not CSAA's general power to discharge plaintiffs without cause, but its power to discharge them, as it expressly did, for a reason it had promised not to use as a basis for their discharge.

Finally, the Court rejected the employer's ability to rely on the standard commission plan language under which the employer reserved a right to "modify" the plan at its sole discretion whenever it wanted. 

[T]he reserved power to modify the compensation plan does not pose an insuperable barrier to plaintiffs recovery because it can easily be understood as qualified by the obligation to honor the promise of reduced [quotas] as to those representatives who had qualified for it-i.e., earned it-while it was still in effect.

Taken together, these holdings are a major victory for the rights of commissioned employees.  Indeed, the McClaskey Court rejected the most common contract arguments offered by unscrupulous employers who might otherwise be tempted to evade their promises to pay commissions even after their employees have performed every condition asked of them.    

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