ARBITRATION AWARD: UNPAID SALES COMMISSIONS
Natalie Koss, Esq., Wins $200,000+ Arbitration Award for Federal Sector Technology Salesperson
Attorney Natalie Koss has won a $208,637.29 arbitration award in an unpaid sales commission dispute for an employee of an open-source software company. The employee, a sales account manager, managed several of the software company’s federal sector accounts. The employee handled contracts with multiple federal agencies that were worth millions of dollars.
The employer annually books billions of dollars in sales revenue from support contracts and licensing of open-source software subscriptions and consulting services.
In this dispute, the employee alleged that his employer had breached his incentive plan by failing to pay much of his earned commissions. The arbitrator agreed and issued a significant award for the unpaid sales commissions, liquidated damages, attorney’s fees and costs.
Although the employee resided and worked in Virginia, his employer included a choice of law provision in his incentive plan identifying North Carolina law as the applicable legal authority for his claims for unpaid commissions.
The arbitrator found that the employer violated the North Carolina Wage and Hour Act (“NCWHA”) and breached the company’s incentive plan with the employee.
FACTS PRESENTED AT ARBITRATION
The case was a dispute about the classification of certain software deals and the classification of product lines within those deals. In software and technology sales, companies often apply the categories of “new business” or contract “renewal” to every deal. Each category pays different commission amounts, and the difference between the amounts is significant.
In this dispute, the employee alleged that his employer incorrectly applied these categories to his sales, which cost him six figures in lost compensation and unpaid commissions.
In 2019, the employee and his colleagues were successful in closing a deal valued in excess of $2.3 million with a federal agency that included $1.3 million for a six-month software subscription. The employee entered this sale as “new business” in the company’s customer relations system.
The employer’s operations team, which is responsible for validation of transactions, questioned the employee about this classification. The employee explained to the operations team that the transaction was separate from other agency contracts that were correctly listed as renewals. The operations team initially agreed with the employee and classified the deal as a new transaction.
When the employee received his sales incentive statement the following month, the statement correctly categorized the transaction as new business. As a result of this and other sales, the employee received nearly $100,000.00 in commissions.
A few months later, however, after the end of the fiscal year, the operations team reclassified the transaction. The company sent a spreadsheet to the employee’s managers with new calculations. The spreadsheet included several errors. Notably, it did not correctly reflect the software product lines that the employee sold. The reclassification calculation was also wrong.
The employee never received the spreadsheet, and the errors were only found during the arbitration process. In finding on behalf of the employee, the arbitrator stated that “liability on this claim is clear”, because the company’s sales operations representatives incorrectly categorized the types of products sold to the customer.
As a result of the reclassification, the $1.358 million in new business was downward adjusted to $336,000. Since this new amount created a negative commissions balance, the employer did not pay the employee his earned commissions for the quarter resulting in a clawback of his earned commissions.
The employee opened a dispute ticket.
The operations team replied to the employee and delivered a training slide with the note, “this has been discussed many times over the last month that these deals were to be classified as renewal. The customer is the same and products align – see definition below.”
Another member of the operations team emailed the employee saying, “These are the definitions defined on this page since last year” with a link to a webpage. Neither of these team members provided the spreadsheet, nor did they offer to explain their own calculations.
Ultimately, the employee resigned because the company violated its incentive plan and the NCWHA.
Shortly thereafter, the employee retained Natalie Koss and filed a demand for arbitration and complaint pursuant to the arbitration clause in his incentive plan. In this complaint, he asserted claims for violation of the NCWHA, breach of contract, and in the alternative, implied contract/quantum meruit, based on this incident and others.
CLAIM: VIOLATION OF THE NCWHA
The employee claimed that the Respondent violated the NCWHA by failing to properly pay him sales commissions. The most significant parts of the complaint were the employer’s reclassification of the federal sales deal, as well as the failure to pay a termination bonus after his resignation.
Under the NCWHA, employers are required to “pay every employee all wages and tips accruing to the employee on the regular payday.” N.C. Gen. Stat. § 95-25.6. “Wages” include “commissions, bonuses and other amounts promised when the employer has a policy or a practice of making such payments.” N.C. Gen. Stat. § 95-25.2(16). Wages “based upon bonuses, commissions, or other forms of calculation may be paid as infrequently as annually if prescribed in advance. N.C. Gen. Stat. § 95-25.6.
The NCWHA also requires employers to “[m]ake available to [their] employees . . . employment practices and policies with regard to promised wages.” N.C. Gen. Stat. § 95-25.13(2). Furthermore, any changes to these wages require a notice to employees at least 24 hours before the change. N.C. Gen. Stat. § 95-25.13(3).
The North Carolina Administrative Code (“NCAC”) provides guidance on the NCWHA. The NCAC states that wages computed under a commission policy or practice “which does not establish specific earning criteria cannot be reduced or eliminated as a result of a change in policy of practice” until after the effective date of the change. 13 NCAC 12.0307(e).
During the arbitration, the employer admitted that the company did not correctly pay a commission on the new subscription. The employer indicated that the deal’s classification as “renewal” instead of “new business” was an error, and that the employee should have received credit for $394,549.65 in new subscriptions.
The employer, however, did not provide the amount of the actual unpaid commissions resulting from the classification change. Instead, the arbitrator used the employee’s incentive policy to calculate the difference. The arbitrator noted that the employer’s decision to withhold the incentive spreadsheet, which the employee requested numerous times, would have largely resolved the commission dispute prior to arbitration. The employer, however, chose not to be forthcoming with this information.
The arbitrator found in favor of the employee on this instance under this claim.
CLAIM: BREACH OF CONTRACT
In North Carolina, a breach of contract consists of: (1) the existence of a valid contract, and (2) breach of the terms of the contract. Harper v. Vohra Wound Physicians of NY, PLLC, 841 S.E.2d 580, 583 (2020).
The employee asserted that the employer breached the incentive plan with respect to how it handled the misclassified transaction, as well as other transactions.
Although the employee was not entitled to a double recovery, the arbitrator found that the incentive plan was a valid contract that the employer had breached in reclassifying the software as a renewal instead of a new business. Therefore, the arbitrator found in favor of the employee’s breach of contract claim.
EMPLOYER’S COUNTERCLAIM IS DENIED
While the company brought a baseless counterclaim for overpayment of commissions in an attempt to intimidate the employee, the arbitrator rejected the company’s counterclaim in full. The arbitrator stated, “[b]ecause Respondent is accountable for its description and handling of commissions in Claimant’s Q2 and Q3 Sales Incentive Statements under the FY20 Plan, Respondent’s claim for repayment” does not have merit under the NCWHA or a contract theory.
The arbitrator determined that the company failed to follow its own incentive plan when the company used the term “total amount earned” in the employee’s incentive statement but the incentive plan only allowed company to clawback funds based upon advanced earnings. The arbitrator denied the company’s counterclaim for repayment of commission pay also because of these terms in the employee’s incentive plan.
DAMAGES & AWARD
The arbitrator’s decision in favor of Natalie Koss’s client included an award for $208,637.29.
Under North Carolina law, an employer who violates the NCWHA is liable to the employee in the amount of their unpaid wage amounts due plus interest at the legal rate of 8% set forth in N.C. Gen Stat. § 42-1. N.C. Gen. Stat. § 95-25.22(a).
The arbitrator found that the employee is entitled to unpaid commissions plus payment of a termination bonus, pre-judgment interest, post-judgment interest and liquidated damages. The employer was entitled to deduct a draw that was paid around the time of resignation. The arbitrator also awarded the employee the pre-judgment and post-judgment interest of 8% per annum.
In addition to a recovery of unpaid wages, the statute provides for an award of liquidated damages “in an amount equal to the amount found to be due” in unpaid wages, unless the employer makes a satisfactory showing of good faith. N.C. Gen Stat. § 95-25.22(a1). The court may order costs and reasonable attorney’s fees to be paid by the defendant. N.C. Gen Stat. §95-25.22(d).
The employee received liquidated damages for a portion of the unpaid commissions. This was due to the operations team’s mishandling of the employee’s original internal dispute. Not only were the team’s responses unhelpful, but they also assumed that the employee had the incentive information. This portion of the case would have been resolved had the team members simply provided the information, but they did not, and, instead the employee had to file suit and wait more than a year to recover the unpaid commissions. Therefore, the arbitrator provided the employee a specific amount of liquidated damages, not subject to interest. The arbitrator added attorney’s fees and costs to the final award.
UNPAID COMMISSION & WAGE CLAIM MATTERS
Even though the law mandates a fair and accurate wage, and there are many penalties that employers face for not being transparent with employee pay, breaches of wage statutes are a common occurrence for salespeople.
Technology sales companies burden their salespeople with complex and lengthy incentive plans that employers frequently violate. The complexity of these compensation agreements, and the frequent changes and updates that employers make to them, create so much confusion that salespeople often abandon their pursuit of unpaid commissions.
Employees will discover these errors or identify these flagrant violations of the relevant wage laws, but employers can be reticent, evasive or oppressive in ignoring or perpetuating these miscalculations.
When this happens, salespeople may seek out experienced counsel to examine violations of any applicable wage statutes and breach of contract claims. Although legal action, whether through the arbitration process or through a lawsuit, can be daunting, employees should not be afraid to assert their right to fair and timely pay.
In many situations, salespeople may collect unpaid commissions and wages through a non-adversarial negotiation. Natalie Koss regularly represents salespeople in negotiating unpaid commissions. When that process doesn’t produce a result favorable to the salesperson, litigation or arbitration is the next step. Through her experienced counsel and representation, Ms. Koss has collected millions of dollars in unpaid commissions and employment discrimination claims for her professional sales clients.