A recent case filed in the Western District of Virginia highlights the importance of employers creating written commission and bonus plans for applicable employees. Additionally, these plans need to be carefully drafted to ensure they are enforceable. In Morris v. Taylor Communications Secure & Customer Solutions, Inc., the court found that although there was a compensation plan in place, it included language that made it unenforceable. Since there wasn’t an enforceable compensation plan, the court determined the employee had stated claims for unjust enrichment, quantum meruit, and fraudulent and negligent misrepresentation, and should receive the reasonable value of the work performed. The court also declined to dismiss a claim for punitive damages, meaning the employer may also be liable for additional punitive damages.
Morris v. Taylor Communications Secure & Customer Solutions, Inc.
James Matthew Morris, a 61-year-old Virginia resident, began working for Taylor Communications Secure & Customer Solution, Inc. (“Taylor”) in June 2015 as a Technical Solutions Consultant. Morris’s role included working with potential clients to assess their needs, create solutions, and obtain client signatures on service agreements and statements of work. Taylor’s commissions and bonuses are set by an annual Sales Compensation Plan. The 2019 Sales Compensation Plan included a clause giving Taylor “the right to modify or eliminate the plan, or any of its components, at [Taylor’s] sole discretion.” According to the plan, terminated employees “will not earn any more bonuses” and employees “must be employed by [Taylor] at the time the Bonus is paid in order to earn the Bonus.”
Before Morris’s termination, he was waiting for the 2020 Sales Compensation Plan to be published. In mid-March, Taylor told Morris the 2020 plan was almost completed and would have a set commission schedule. Morris had been working on Taylor’s behalf on a large deal “under the understanding and based on representations by Taylor” that he would receive a significant commission once a master services agreement and statement of work were executed. These agreements were executed on February 10, 2020. Taylor would have owed Morris $180,000 for his work with the client under the 2019 plan, $600,000 under the 2020 plan originally explained to Morris, and $224,000 under the 2020 plan actually published. Morris argued he was also owed a large commission for work with another client, as well as a $15,000 bonus. Taylor terminated Morris’s employment on April 6, 2020 and Morris did not receive these commissions or bonus.
Quantum Meruit and Unjust Enrichment
Virginia only allows claims of quantum meruit and unjust enrichment when there is no enforceable express contract between the parties covering the subject matter. Taylor argued that any claims for commission or bonuses would arise under the Sales Compensation Plan. However, Morris argued that both the 2019 and 2020 plans lacked the requisite consideration to constitute enforceable contracts. The Fourth Circuit previously held that no binding contract existed when the employer’s commission plan contained provisions stating that the employer reserved the right to modify or cancel the commission plan at any time and the employee was not entitled to any payment before receiving such payment. The court here found that Taylor similarly reserved the right to modify or eliminate the Sales Compensation Plan. Taylor’s Sales Compensation Plan also stated that an employee would not earn bonuses if he was terminated and he must be employed at the time bonuses are paid to earn a bonus. The court concluded that, similar to the Fourth Circuit’s previous holding, “there were no conditions that [the employee] could satisfy to create a binding contract” and the Sales Compensation Plan does not constitute an enforceable contract.
A claim for quantum meruit arises “where service is performed by one, at the instance and request of another, and nothing is said between the parties as to compensation for such service.” The damages for a successful quantum meruit claim are equal to the reasonable value of the work performed, less the compensation actually received for the work. According to the Supreme Court of Virginia, a claim for quantum meruit may arise if: (1) the parties contracted for work to be done, but the parties did not agree on a price; (2) the compensation mentioned is too indefinite; (3) there is a misunderstanding as to the price to be paid; or (4) in some instances, the contract is void and of no effect. A claim for unjust enrichment arises when the defendant has not requested the plaintiff’s services.
In the Fourth Circuit’s previous decision regarding an employer’s commission plan, the employer provided employees with conflicting information about whether or not commissions would be capped. There, the Fourth Circuit concluded that the letters the employer sent explaining the commission plan did not contractually bind the parties regarding the amount of commission to be paid. When the plaintiff alleged his employer continuously represented that he would receive a particular percentage of sales revenue on deals he closed, the Fourth Circuit concluded the plaintiff stated a claim for unjust enrichment, since the plaintiff at least alleged a misunderstanding as to the price to be paid for his work. Additionally, since the letters explaining the commission plan didn’t create a binding agreement regarding compensation, the Fourth Circuit concluded that quantum meruit applied to allow the employee to “receive a reasonable value of the work performed.”
Here, the court found that the 2019 and 2020 Sales Compensation Plans similarly did not constitute enforceable binding contracts. Since Morris similarly argued that he was working on Taylor’s behalf “under the understanding and based on representations by Taylor” that he would receive a significant commission and he was informed he would be paid a commission once the agreements were executed, the court here concluded Morris asserted a claim for unjust enrichment and quantum meruit to receive a reasonable value of the work performed.
The court here also found Morris sufficiently pled claims for fraudulent and negligent misrepresentation, when he claimed: (1) Taylor told him the 2020 Sales Compensation Plan would be retroactive to January 1, 2020, once published; (2) he was told the 2020 Sales Compensation Plan was nearly finished and would award commissions on a specified scale; (3) he worked on a deal for over a year under the understanding and based on representations by Taylor he would receive a significant commission; and (4) Taylor informed him he would be paid a commission once certain agreements were executed. Additionally, the court declined to dismiss Morris’s claim for punitive damages.
What Does Morris v. Taylor Communications Secure & Customer Solutions, Inc. Mean For Employers?
This case highlights the importance of employers creating written commission and bonus plans for applicable employees. Additionally, these plans needs to be carefully drafted to ensure they are enforceable. While, here, Taylor had a Sales Compensation Plan in place, certain language rendered the plan unenforceable, including language stating: Taylor’s “right to modify or eliminate the plan, or any of its components, at [Taylor’s] sole discretion;” terminated employees “will not earn any more bonuses;” and employees “must be employed by [Taylor] at the time the Bonus is paid in order to earn the Bonus.”
Due to this language in the plan, the court determined the Sales Compensation Plan was not a binding agreement and did not constitute an enforceable contract. Based on the fact that there was no contract governing the commissions or bonuses for Morris’s work with clients, combined with repeated statements by Taylor that Morris would receive commissions for deals once agreements were signed, the court found Morris sufficiently alleged multiple claims against Taylor. The court determined that Morris was entitled to “a reasonable value of the work performed,” but did not discuss what that value would be. The court’s ruling also leaves open the possibility of Taylor facing additional punitive damages.
Taylor, and employers in similar situations, run the risk of courts finding the reasonable value of the work performed in excess of what the employee would have received under the compensation plan intended to be enforceable. Additionally, the lack of an enforceable contract on the matter leaves employers open to liability and similar lawsuits.
To avoid potential litigation and this uncertainty regarding compensation, employers should ensure they have written, enforceable plans setting out commission and bonus structures for any employees that may receive such commissions or bonuses.
If you need more guidance or information, contact the employment law experts at General Counsel, PC today at 703-556-0411. Attorneys at General Counsel, PC are specialized in labor and employment law and have experience drafting, reviewing, and negotiating all types of employment agreements for business owners and individuals.