Labor & Employment Law Daily IBM sales rep will go to trial on misrepresentation, discrimination claims over reduced commission payments
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Thursday, April 16, 2020

IBM sales rep will go to trial on misrepresentation, discrimination claims over reduced commission payments

By Wayne D. Garris Jr., J.D.

A PowerPoint presentation identified as the “primary education” for commission employees stated that the company would not cap his commission compensation.

A federal district court in California granted in part and denied in part IBM’s motion for summary judgment against the claims of a software sales representative who alleges that his commission payments were reduced despite the company’s representations that commissions would not be capped. Denying summary judgment on the sales rep’s fraudulent representation and negligent misrepresentation claims, the court found that the sales rep reasonably relied on statements in a PowerPoint presentation that commissions were “uncapped,” as the record showed that the employer had never reduced another employee’s commissions before, and employees were told to rely on the PowerPoint as their “primary education” for their compensation plan. The sales rep’s race discrimination claim also advanced after the court found that similarly situated white employees on similar projects did not have their commissions reduced, and that an IBM VP decided to reduce the sales rep’s commission on a second project before the sales rep began working on the project and even though the VP was not involved with the project (Beard v. International Business Machines Corporation, April 9, 2020, Alsup, W.).

Compensation plan. In July 2017, IBM sent the sales rep, a sales rep, an “incentive plan letter” (IPL), which described his commission plan for the second half of 2017 and set his sales quota at $934,736. The IPL stated that the employer “reserves the right to review and, in its sole discretion, adjust the incentive achievement and/or related payments.” During the same period, the sales rep received and reviewed a PowerPoint presentation from the company which stated that it covered “the information you will need to understand your 2017 plan” and also repeatedly stated that “payments” under the compensation plan would be “uncapped.” These statements about uncapped payments were also allegedly repeated by management during sales meetings.

Big deals. In 2017, the sales rep closed two large deals with a customer which generated $25.2 million in revenue. Based on the size of the deals, the sales rep was entitled to $2,901,806 in commissions. His first, second, and third-line managers all approved paying him the full commission; however, an IBM VP refused and instead attributed only $2 million worth of credit to the sales rep for each deal. As a result, he received only $410,572 in commissions. As to the second deal, the VP made the decision to reduce the sales rep’s commission prior to the closing of the deal.

Internal complaint and lawsuit. The sales rep filed an internal complaint alleging discrimination and violations of the employer’s payment policies. The sales rep alleged that two white sales representatives were treated more favorably because the employer had not adjusted their commissions on similar deals in 2017. Their commissions also triggered a standard out-of-range review, which their line managers also approved. The internal investigation report concluded that no discrimination or violation occurred.

The sales rep filed suit alleging violations of the California Labor Code, violations of California’s Unfair Competition Law, race discrimination, unjust enrichment, fraudulent misrepresentation, and negligent misrepresentation. The employer moved for summary judgment.

Fraudulent misrepresentation. According to IBM, the statements about uncapped payments were not false because it did not put a cap on the sales rep’s commission. Instead, the employer made “an adjustment to commissions on a specific deal” pursuant to the IPL. The court was not persuaded by this argument, however, pointing specifically to emails and testimony from IBM employees referring to the reduction in the sales rep’s commissions as a “cap.” Based on this evidence, the court concluded that “whether or not the review of a transaction disclaimer can be read consistently with the guarantees of uncapped payments in the PowerPoint presentation is a genuine issue of material fact for the jury to decide.”

Reasonable reliance. Denying the employer’s motion for summary judgment on the fraudulent representation claim, the court concluded that the sales rep’s reliance on the employer’s representation that this commission would be uncapped was reasonable. First, the PowerPoint stated that it was the “primary” education for sales representatives to understand the terms of their compensation, so it was reasonable for the sales rep to rely on the PowerPoint regardless of what was stated in the IPL. Further, several employees testified it would be reasonable for the sales rep to rely on PowerPoint. The employer countered that the sales rep was aware of a review process, but it failed to establish how knowledge of the process precluded reliance, especially when the sales rep’s direct supervisors approved his full commission.

Negligent misrepresentation. The court denied the employer’s motion for summary judgment on the sales rep’s negligent misrepresentation claim for the same reasons as the fraudulent misrepresentation claim.

Unjust enrichment. Because the IPL was not a contract, the sales rep could bring a claim for unjust enrichment. The court concluded that because the sales rep established a genuine issue of material fact as to whether or not the employer committed fraud, he also established a genuine issue of material fact as to whether or not the employer unjustly enriched itself by significantly reducing his commissions and whether it would be unjust for the employer to retain the benefit the sales rep conferred on it. Thus, the court denied the motion for summary judgment on the unjust enrichment claim.

Unfair competition. California’s Unfair Competition Law prohibits any “unlawful, unfair, or fraudulent business act or practice.” The sales rep alleged multiple violations of the UCL under unlawful, unfair, and fraudulent prongs. Here, the court denied summary judgment on the UCL claims alleged unfair and fraudulent business practices because they relied on the same allegations as the sales rep’s misrepresentation and unjust enrichment claims.

Unlawful. Under the “unlawful” prong, the sales rep alleged violations of various provisions of the California Labor Code. First, the court granted summary judgment on those claims that the sales rep failed to oppose.

Next, the sales rep alleged that the employer violated Section 221 which makes it unlawful for an employer “to collect and receive from an employee any part of the wages theretofore paid by said employer to said employee” and Section 223 which prohibits paying “a lower wage while purporting to pay the wage designated by contract.” Because the IPL is not contract, the employer was entitled to summary judgment.

Lastly, under Section 2751 “[w]henever an employer enters into a contract of employment with an employee for services to be rendered within this state and the contemplated method of payment of the employee involves commissions, the contract shall be in writing and shall set forth the method by which the commissions shall be computed and paid.” As the court had previously stated, the IPL is not a contract. Thus, the employer was in violation of Section 2751 by paying the sales rep by commission and not having a contract set forth the method of payment. Consequently, the court denied summary judgment on the claim with respect to Section 2751.

Race discrimination. The sales rep established that there was at least one similarly situated employee outside of his protected class whom the employer treated more favorably. The comparator worked as a software sales representative, had the same second and third-line managers as the sales rep, had a similar commission plan, and closed a large deal in 2017 which had to be approved by two of the same managers as the sales rep. However, once the managers approved his sales achievement, the employer paid the full commission to the comparator. This was sufficient for the sales rep to establish his prima facie case.

Pretext. The employer’s legitimate, non-discriminatory reason for reducing the commission was that the VP considered the deals unique and he wanted to make sure that IBM paid the sales rep an amount that reflected his contribution to the deals. The sales rep argued that the employer’s reasons are pretextual because its reasons shifted and because every other employee who worked on the same deal was paid their full commission.

The employer admitted that of all the employees who worked on the deals, it only reduced the commissionable revenue of the sales rep. However, it pointed to the fact that the sales rep remained the highest paid commission employee on the deal as evidence against discrimination. But the court concluded that a reasonable jury could find that the reduction, regardless of the final amount, was discriminatory. No other employee on the deal had their commission reduced. The evidence showed that the VP was upset about the amount the sales rep’s commission, and because the VP reduced the sales rep’s commission on the second deal despite having no involvement on that deal. Additionally, the employer’s explanation that it wanted to make sure that the sales rep’s commission reflected his contribution to the deal lacked credibility since his commission on the second project was reduced one month before the deal closed and he completed his work.

Equal Pay Act. Lastly, the sales rep brought an Equal Pay Act claim. The employer was entitled to summary judgment that claim, however, because the sales rep failed put forth sufficient facts surrounding the skill, effort, responsibility, and working conditions of similarly situated white employees on other deals.

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