Labor & Employment Law Daily Illinois Wage Act claim revived; ‘incentive payments’ more like commissions than bonuses and required monthly payment
Wednesday, June 27, 2018

Illinois Wage Act claim revived; ‘incentive payments’ more like commissions than bonuses and required monthly payment

By Kathleen Kapusta, J.D.

Office Depot did not breach an employee’s contract by failing to comply with its old compensation plan through the date she acknowledged its new plan in writing, or by retroactively reduce commissions that she had earned, and thus summary judgment was properly granted on her breach of contract claim, the Seventh Circuit ruled, affirming in part the decision of the court below. Predicting, however, that the Illinois Supreme Court would treat Office Depot’s “incentive payments” as commissions rather than bonuses, the court reversed summary judgment against her Illinois Wage Act claim (Sutula-Johnson v. Office Depot, Inc., June 25, 2018, Hamilton, D.).

The employee began selling office furniture with Boise Cascade, which later merged with OfficeMax. Under OfficeMax’s 2010 compensation plan, furniture account executives were paid entirely in commissions at a rate of either 27% or 20% of each sale, depending on the sale’s profits. Under terms negotiated by the employee with OfficeMax, she earned commissions upon invoicing, and OfficeMax paid commissions monthly.

New plan. In 2013, OfficeMax merged with Office Depot, which continued to pay the employee under the OfficeMax plan until July 2014, when it announced a new compensation plan that significantly changed how the employee was paid and reduced her total pay. Under the new plan, the employee received a combination of salary and “incentive payments,” which were paid quarterly and with lower rates than the OfficeMax commissions. Further, instead of earning commissions upon customer invoicing, she “accrued” the incentive payments upon invoicing, but she did not “earn” them until the day Office Depot actually paid them to her, usually 45 days after the end of each calendar quarter.

Lawsuit. Although the employee initially objected to the plan, she continued working for the company. She ultimately signed a written acknowledgement of the plan in March 2015 and resigned in December. She later sued Office Depot, alleging it breached its contract with her by paying her under the new compensation plan before March 2015 when she signed the acknowledgment form. She also claimed 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. The district court granted summary judgment to Office Depot on all counts.

Breach of contract. On appeal, the employee argued that Office Depot did not effectively amend its employment contract with her until she signed a written acknowledgment form in March 2015. Observing that the threshold question was whether there was a binding contractual term to start with, the court pointed out that the OfficeMax plan stated expressly it was not a contract and provided that OfficeMax, in its sole discretion, could amend or terminate the plan at any time. Thus, the employee could not reasonably have treated the plan as having created binding, prospective contractual rights that could not be changed without new consideration.

Acceptance of new plan. And while she argued that the new compensation plan could not apply to her until she agreed to its terms, given that she continued to work for Office Depot, neither her oral objection to the plan nor her refusal to sign was enough to reject it. Therefore, she accepted the new terms by continuing to work, and Office Depot did not breach any binding contractual obligations when it began paying her under the new plan.

Also rejected was her claim that Office Depot breached her contract by retroactively reducing her commissions by applying the plan she signed in March 2015 to sales that occurred in 2014. To the extent she wanted the higher OfficeMax commission rates on all sales that were in the pipeline but not yet invoiced in July 2014 when Office Depot announced the new plan, neither plan entitled her to that result as a matter of contract law, the court explained, affirming summary judgment against this claim.

Illinois Wage Act. As to her Illinois Wage Act claim, the employee argued that the incentive payments were “commissions” for which the Act required monthly, not quarterly, payment, and the Act entitled her to commissions that were invoiced before she resigned in December 2015, which Office Depot has refused to pay. Noting that the critical question is whether the incentive payments should be deemed commissions or bonuses under the Act, the court, turning to the statutory language, said that commissions fall under definition of wages and must be paid once a month. The Act, however, does not address how frequently bonuses must be paid.

More like a commission than a bonus. After next looking to the applicable regulations, the court concluded that the incentive payments at issue here could arguably fit within both definitions. Neither party identified Illinois case law that distinguishes between commissions and bonuses under the Wage Act, said the court. It noted that it would have to predict how the Illinois Supreme would rule, turned to the ordinary meaning of commission and bonus, and determined that the incentive payments here were better understood as commissions. “Most important,” said the court, “the payments are compensation for making a sale and are paid out as a set percentage of each transaction’s value. That is the essence of a commission.”

Further, the payments were mandatory rather than discretionary, were paid according to a set formula, and were based on the value of the individual employee’s sales, rather than on company- or department-wide performance. In addition, according to the employee, the incentive payments accounted for more than two-thirds of her compensation, which made them seem more like “compensation for services performed” than “compensation given in addition to the required compensation for services performed.” Office Depot paid a month draw against future incentive payments, noted the court, observing that it was not familiar with the notion of a “draw against a future bonus.”

While Office Depot argued that the incentive payments could not be commissions because they were tied to annual sales targets that it calculated on a quarterly basis, the payments remained compensation for services performed under the plan, calculated as a set percentage of the value of sales that employees make on Office Depot’s behalf. “Those are commissions,” said the court, “and the Illinois legislature has chosen to require that commissions be paid monthly. We need to respect that choice, and we see no basis in Illinois case law for predicting that tying commissions to individual sales targets transforms them into bonuses.” Further, the court noted, Office Depot’s own language undermined its argument; when it originally explained the plan to its employees, it called the payments commissions.

Earned. Given the court’s prediction of Illinois law, the court found that Office Depot was not entitled to summary judgment on the employee’s statutory claims. Whether Office Depot complied with the Act depended on when the commissions were “earned,” and the court observed that its plan said they were not earned until the day they were paid, once every quarter. This set an invalid condition for its employees to “earn” their commissions because the Act requires employers “at least semi-monthly, to pay every employee all wages earned during the semi-monthly pay period.” And because the Act requires that commissions must be paid at least monthly, the court found an employer cannot satisfy this requirement by simply declaring that wages are not earned until the day they are paid.

As to Office Depot’s contention that it paid employees a semi-monthly salary and a $250 monthly draw against future commissions (or incentive payments), the court explained that a small monthly draw does not meet the requirement that the employer pay “all wages earned” during the relevant period.

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