Labor & Employment Law I JANUARY 29, 2019

Commissioners or Bonuses? It Makes a Difference

In 2010, OfficeMax adopted a written compensation plan that covered its furniture sales group, including Daryl Sutula-Johnson. Under that plan, OfficeMax paid furniture account executives, including Sutula-Johnson, entirely in commissions. OfficeMax paid commissions at a rate of either 27% or 20% of each sale, depending on the profit on the sale. Sutula-Johnson earned commissions upon invoicing.

OfficeMax and Office Depot merged in November 2013. On July 14, 2014, Office Depot announced that it was adopting a new compensation plan that would apply to all furniture account executives effective immediately.

The new plan significantly changed how Sutula-Johnson was paid and reduced her total pay. For the first time, Sutula-Johnson received a combination of salary and what Office Depot called “incentive payments.” The incentive payments were paid quarterly and with lower rates than the OfficeMax commissions: 13.5% or 10% instead of 27% or 20%.

The new plan also changed when and how Sutula-Johnson earned and received her commissions. Instead of earning commissions upon customer invoicing, the plan said that she “accrued” the incentive payments upon invoicing but did not “earn” them until the day Office Depot actually paid them to her.

Sutula-Johnson determined that the new compensation plan would reduce her pay significantly. She immediately objected to the new plan.

Despite her objections, Sutula-Johnson continued working for Office Depot for more than another year. In early 2015, Office Depot issued a new written version of the plan with the same key terms and insisted that Sutula-Johnson sign it. She signed a form acknowledging the plan in March 2015. Later that month she filed suit while still working for Office Depot. She resigned in December 2015.

Sutula-Johnson‘s complaint alleged breach of contract, unjust enrichment, and violations of the Illinois Wage Payment and Collection Act. She claimed that Office Depot breached its contract with her by paying her under the new compensation plan before March 2, 2015, when she signed the acknowledgment form. She also asserted that the “incentive payments” were commissions under the Illinois Wage Act and that Office Depot violated the Act by paying the commissions quarterly rather than monthly. On appeal she dropped her claim for unjust enrichment.

The district court denied Sutula-Johnson’s motion for summary judgment and granted Office Depot’s on all counts. Sutula-Johnson took an appeal, and on appeal, dropped her claim for unjust enrichment.

The appeals court agreed the breach of contract count failed. In her claim for breach of contract, Sutula-Johnson made two arguments to support her claim: (1) that before May 2, 2015, any amendment to her contract was without consideration; and (2) that she did not accept the new terms until she signed them. In her view, a new contract was not formed until March 2, 2015.

The court rejected these arguments.

In Illinois an employer’s policy can create contractual rights that the employer cannot amend unilaterally without consideration.

The threshold question, though, is whether there was even a binding contractual term to begin with.

In Illinois, an employer’s policy creates contractual rights only when: (1) it contains “a promise clear enough that an employee would reasonably believe that an offer has been made;” (2) the employer disseminates the policy “to the employee in such a manner that the employee is aware of its contents and reasonably believes it to be an offer;” and (3) the employee accepts “the offer by commencing or continuing to work after learning of the policy.” The Office Max plan stated expressly that it was not a contract, so Sutula- Johnson could not meet the first requirement.

Sutula-Johnson argued that the new compensation plan could not apply to her until she agreed to its terms.

The problem, though, is that the law deemed her to have accepted the Office Depot plan when she continued to work after Office Depot told her about the new plan and began paying her under its terms.

In the face of her continued work for Office Depot, neither the oral objection nor the refusal to sign was enough to reject the new compensation plan.

The court of appeals concluded the result was different under the IWPCA. Sutula-Johnson asserted two types of violations of the Act: first that the incentive payments were “commissions” for which the IWPCA required monthly, not quarterly, payment; and second that the IWPCA entitled her to commissions that were invoiced before she resigned in December 2015, which Office Depot had refused to pay.

In the eyes of the court of appeals, the critical question was whether the incentive payments should be deemed “commissions” or “bonuses”. The IWPCA imposes stricter requirements for payment of commissions than for bonuses.

The court predicted that the Illinois Supreme Court would treat Office Depot’s “incentive payments” as commissions under the IWPCA .

“Commissions” fall within the broad definition of wages, but the IWPCA provides that they “may be paid once a month.” The IWPCA does not address how frequently bonuses must be paid.

Under the regulations, commissions are defined as “compensation for services performed pursuant to an employment contract or agreement between the two parties.” Bonuses are “compensation given in addition to the required compensation for services performed.” The IWPCA applies only to “earned” bonuses, not discretionary and gratuitous bonuses.

The incentive payments at issue could arguably fit within both definitions. The payments were certainly “compensation for services performed” —selling office furniture—”pursuant to” the compensation plan and therefore could easily be deemed commissions. But they were also paid on top of the base salary, and so might be deemed “compensation given in addition to” some other required compensation and might be considered earned bonuses. And they were “based on” the value of the employee’s sales and whether she was still employed on a certain date, both of which are “objective factors” that could trigger an earned bonus.

The court concluded that the incentive payments in this case were better understood within the ordinary meaning of “commissions” than of “bonuses.” Most important, the payments were compensation for making a sale and were paid out as a set percentage of each transaction’s value. That is the essence of a commission.

Whether Office Depot complied with the Act depended on when the commissions were “earned.” The Office Depot plan said that commissions were not earned until the day they were paid, once every quarter. The court agreed with Sutula-Johnson that Office Depot’s plan set an invalid condition for its employees to “earn” their commissions. The IWPCA requires employers “at least semi-monthly, to pay every employee all wages earned during the semi-monthly pay period.” Commissions can be paid on a monthly basis, but that is an exception to the semi-monthly requirement. The IWPCA thus requires that commissions must be paid at least monthly.

Under Office Depot’s quarterly payment scheme, employees might not “earn” a commission on a sale until over three months after they completed all work on it. This delay (and the effective forfeiture of earned commissions upon resignation) violated the IWPCA.

Office Depot insisted that even though it did not pay commissions in full until months later, it paid employees a semi-monthly salary and a $250 monthly draw against future commissions (or “incentive payments”). The court didn’t buy this argument. A small monthly draw does not meet the requirement that the employer pay “all wages earned” during the relevant period.

Office Depot could not satisfy the requirement that it pay all commissions earned during one pay period by paying only all salary earned during that period.

Given the court of appeals’ prediction of Illinois law, Office Depot was not entitled to summary judgment on Sutula-Johnson’s statutory claims. The court reversed and remanded for further proceedings on the IWPCA claims.

The case is Daryl Sutula-Johnson v. Office Depot, Inc. 893 F.3d 967 (7th Cir. 2018).