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Employment Law Alert

January 2004

Changes to Commission Calculations is Risky Business

By David M. Wissert, Esq. and Julie Levinson Werner, Esq.

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wo New Jersey Appellate Division decisions may further define employers’ potential liability to employees who are paid all or a portion of their compensation on a commission basis. In Winslow v. Corporate Express, Inc., the New Jersey Appellate Division considered whether an employee had a viable cause of action against his employer for reducing his compensation by changing the method of calculating sales commissions without providing prior notice of the

• change. In this case, the plaintiff worked as a sales

representative for an office supplies distributor and was paid solely by commission. At the beginning of the plaintiff’s employment, the employer calculated the commissions of its sales staff based upon the employer’s gross profits, which were determined by the actual costs of the products sold. However, without providing prior notice to the plaintiff or its

• ther

sales representatives, the employer subsequently changed its method of calculating commissions by adding a “load factor” to its actual costs to account for overhead expenses, which resulted in lower commissions payments to its sales

• representatives. The plaintiff first became aware of

this change in the employer’s method of calculating commissions when he received his commission check which reflected a significant decrease in his pay. On appeal, the Appellate Division held that the plaintiff could proceed with claims against his employer for violation of New Jersey’s Wage Payment Law, breach of contract, and fraud. Among other provisions, the Wage Payment Law requires employers to notify employees of any changes in pay rates including sales commissions before they implement such changes. The court determined that an employer that modifies the method by which it calculates commissions must announce the change to affected employees prior to its implementation. Here, the employer’s failure to notify its sales representatives of the change in calculation of commissions subjected the employer to a private cause of action under the statute.

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The employer’s failure to notify its sales representatives of the change in calculation of commissions subjected the employer to a private cause of action under the statute.

INSIDE THIS ISSUE: To Rehire or Not to Rehire: Sound Policies are the Answer

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The court also concluded that the employer’s actions might constitute a breach of employment contract between the company and its sales representative based on the parties’ prior course

• f dealing, which established the agreed-upon

terms and conditions

• f

employment. Furthermore, the employer could be liable for fraud because it deliberately withheld information from its sales staff regarding its change in the method by which it calculated

• commissions. The lesson of Winslow is clear:

employers who alter the terms and conditions of employees’ compensation, including the payment

• f commissions, must do so prospectively only.

Employers also should reserve the right, at the

• utset of employment, to alter the terms and

conditions of employment at any time during the employment relationship. Another recent Appellate Division decision of interest to employers is Dipaolo v. AM Conservation Group, Inc. In this case, the court considered whether an aggrieved employee’s threat to see a lawyer, based on the employer’s alleged illegal conduct regarding the payment of commissions, can constitute a “whistleblowing” activity under the Conscientious Employee Protection Act (“CEPA”). Among other provisions, CEPA prohibits an employer from taking retaliatory action against an employee because the employee “discloses, or threatens to disclose to ... a public body an activity, policy or practice of the employer ... the employee reasonably believes is in violation of a law....” In DiPaolo, the defendant, a small houseware products company, hired the plaintiff for a sales/ administrative position, and promised to pay her a base salary and commissions based upon a percentage of sales. Apparently, the employer always paid the plaintiff her base salary, but did not pay her commissions timely. After attempting to resolve the issue internally without success, the plaintiff informed her employer that she had met with an attorney. Shortly thereafter, the employer terminated the plaintiff and paid her outstanding commissions. Although a private attorney is not included within the definition of “public body” for purposes

• f CEPA, the statutory definition does include any

federal, state or local judiciary or regulatory agency. The DiPaolo court held that the employee’s report to her employer that she had met with an attorney to seek redress regarding the payment of her commissions could constitute a threat to bring legal action, i.e., to file a lawsuit in court or to file a complaint with the Wage and Hour Commission of the Department of Labor, each of which constitutes a “public body.” Therefore, even though the employer had paid the employee all commissions to which she was entitled, the court concluded the plaintiff had satisfied CEPA’s requirements. Thus, the appellate court affirmed the jury’s award to the plaintiff of over $100,000 including damages, interest, attorneys’ fees and costs. Employers should be aware that the implications

• f both cases extend beyond the parameters of the

facts in each case. Employers should not

Employers should reserve the right to alter the terms and conditions of employment at any time during the employment relationship.

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retroactively change an employee’s compensation; instead, all changes must be communicated

• prospectively. In addition, employers should be

wary of taking any adverse action against an employee who threatens to bring legal action based

• n what the employee believes to be illegal conduct
• n the part of the employer because such action

could be seen as retaliatory. The authors thank Associate Amy L. Komoroski for her assistance in the drafting of this article.

To Rehire or Not to Rehire: Sound Policies are the Answer

By David M. Wissert, Esq. and Julie Levinson Werner, Esq.

A

recent United States Supreme Court decision provides some insight into how an employer may handle situations more effectively when former employees who have been terminated for cause reapply for employment. In Raytheon Co. v. Hernandez, the Supreme Court was presented with the question of whether the Americans With Disabilities Act (the “ADA”) “confers preferential rehire rights on disabled employees lawfully terminated for violating workplace conduct rules.” For technical legal reasons, the Court did not expressly decide this exact issue, but instead concluded that an employer can refuse to rehire former employees if the refusal is based upon a non-discriminatory “neutral no-rehire” policy. Under the ADA, job applicants can bring a discrimination claim against a potential employer alleging that the potential employer improperly discriminated against the applicant based upon the applicant’s disability. In some situations, an addiction to alcohol or drugs may constitute a protected disability under either the ADA or the New Jersey Law Against Discrimination (“NJLAD”). This can create a difficult situation for an employer that wants to ensure that its employees perform their job functions appropriately but does not want to be faced with a discrimination claim against an employee with a legitimate disability. What should an employer do when a former employee, previously discharged for alcohol or drug use, reapplies for a job? In Raytheon, the Supreme Court applied the ADA to such a situation. The plaintiff, Mr. Hernandez, was fired from Raytheon Co. after testing positive for cocaine use. Two years later, he reapplied for a job, indicating on his job application that he had worked previously for Raytheon. The human resources representative who reviewed his personnel file determined that Hernandez had been terminated for workplace misconduct, but apparently the file did not expressly state that the misconduct was related to his prior drug use. However, consistent with Raytheon’s policy against rehiring employees terminated for misconduct, Raytheon did not rehire Hernandez. When a plaintiff alleges he has experienced discriminatory treatment and has made a basic showing of the necessary legal elements, there is a

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rebuttable presumption of discrimination and the burden shifts to the employer to provide a nondiscriminatory reason for its actions. The question raised in Raytheon was whether the employer’s application of a “neutral no-rehire policy” can satisfy its burden of providing a nondiscriminatory reason for its actions. Deciding in the employer’s favor, the Court concluded that Raytheon’s “proffer of its neutral no- rehire policy plainly satisfied its obligation . . . to provide a legitimate, nondiscriminatory reason for refusing to rehire [Hernandez.]” Unfortunately, this does not necessarily end the

• analysis. A rejected applicant still has the
• pportunity to show that the employer’s proffered

reason is pretextual, and that the decision was actually motivated by the applicant’s disability. For example, the human resources representative who reviewed Hernandez’s personnel file stated that she was unaware that he was a former drug addict. However, a question of fact may exist as to whether she actually knew about his addiction, which could defeat a summary judgment motion and allow the plaintiff to bring his case to trial. The impact of the Raytheon case is clear. An employer that effectively applies a “neutral no- rehire policy” is likely to have more success in dismissing groundless discrimination claims filed by former employees who have reapplied for

• employment. The effectiveness of such a policy will
• f course depend on how it is drafted and applied.

Given today’s climate in which employees increasingly are filing lawsuits against their employers, it is important that all of a company’s employment documentation is precise. A no-rehire policy should apply to misconduct generally, and should not specifically reference alcohol or drug abuse. The blanket nature of such a policy may aid an employer in defending against claims of discrimination. If you are concerned whether your employment practices are in compliance with the law, please call Martha L. Lester, Chair of the Employment Law Practice Group, David M. Wissert or Julie Levinson Werner at (973) 597-2500. The authors thank Associate Michael W. Mulligan for his assistance in the drafting of this article.

New Edition Coming Soon

The new edition of “The Practical Guide to Federal and New Jersey Employment Law: The Employers’ Resource” includes:

• Federal Law Updates
• Easy-to-Follow Index
• New In-Depth Chapters

This Guide, published in connection with the New Jersey Business and Industry Association, is the resource for New Jersey employers seeking to comply with New Jersey laws, regulations and procedures in the employment-related area. It provides management with information concerning existing laws, emerging trends, most frequently asked questions, and practical tips on managing the workforce and workplace. You may also wish to obtain a copy of our currently published edition, “A Practical Guide to New Jersey Employment Law: The Employer’s Resource.” To

• btain a copy, please contact Karen Cerreto at

973.422.6466 or email kcerreto@ lowenstein.com.