Last month the Seventh Circuit drew a distinction between “commissions” and “bonuses” as those terms are used in the Illinois Wage Payment and Collection Act (IWPCA) and its implementing regulations. For employers, particularly those in retail, Sutula-Johnson v. Office Depot informs how employers structure, amend and communicate their employee incentive compensation schemes.

Case Background

Furniture salespeople for OfficeMax were paid entirely in commissions at a rate in accordance with the company’s written compensation plan. The general policy was that commissions were earned either when the customer paid or 90 days after the customer was invoiced. Plaintiff negotiated herself a better deal: she earned commissions immediately upon invoicing. OfficeMax paid commissions on a monthly basis.

After OfficeMax and Office Depot merged in 2013, Office Depot continued to pay employees under the terms of the old OfficeMax plan. Then, in July 2014, Office Depot announced a new compensation plan that significantly changed how employees were paid and effectively reduced plaintiff’s total pay. Under the new plan, employees received a combination of salary and “incentive payments,” which were paid quarterly and with lower rates than the OfficeMax commissions. Most significantly, instead of earning commissions upon customer invoicing, plaintiff “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.

Sutula-Johnson initially objected to the new plan, but continued to work for the company and eventually signed a form acknowledging the plan in March 2015. Later that month while still working for Office Depot, Sutula-Johnson sued. She resigned in December 2015. Plaintiff filed her complaint in federal court, alleging:

1. That Office Depot breached her employment agreement by unilaterally imposing the terms of the new compensation plan on her before she signed the acknowledgment, and
2. That the “incentive payments” were in fact commissions under the Illinois Wage Act and that Office Depot violated the Act by paying the commissions quarterly rather than monthly.

The Court’s opinion is instructive on both points.

• Breach of Contract Claim: In an employer-friendly ruling, the Seventh Circuit rejected the employee’s breach of contract claim. The Court recognized that, under Illinois law, an employer’s policy can create contractual rights that employers cannot amend unilaterally without additional consideration (beyond just continued employment). However, the Court ruled that the predecessor OfficeMax compensation plan did not qualify as a binding contract. The plan expressly stated it was not a contract and that OfficeMax could amend or terminate the plan at any time.

The Court gave conclusive effect to these provisions and ruled Sutula-Johnson could not reasonably have treated the plan as having created binding contractual rights. It also rejected plaintiff’s argument that the new Office Depot plan did not apply to her until she actually signed the plan, finding that her continued employment and receipt of payments under the new plan after notice of the plan change operated as acceptance of the new plan and its terms.

• Illinois Wage Payment and Collection Act: The Court sided with plaintiff on her  IWPCA claim. It agreed that Office Depot violated the IWPCA by failing to pay her commissions under the plan on a monthly basis and by refusing to remit payments on commissions that were invoiced prior to her resignation. The Court’s holding turned on whether the “incentive payments” under the Office Depot plan constituted “commissions” or “bonuses” under the IWPCA.

Given the lack of Illinois case law on point, the Court predicted how the Illinois Supreme Court might rule on the issue. It turned to the ordinary meaning of the terms “commission” and “bonus,” as well as the key features of the plan, to determine that the incentive payments were indeed better understood as commissions. The payments were mandatory compensation for services performed, calculated at a set rate of the value of the sales, constituting more than two-thirds of plaintiff’s compensation. Moreover, Office Depot’s own language undermined it’s argument. When it originally communicated the plan to employees, it referred to the payments as commissions.

The Court further determined that Office Depot imposed an invalid condition for its employees to earn commissions. The plan prescribed that commissions were not earned until the day they were paid, once every quarter. Because the IWPCA requires that commissions 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.

Employer Takeaways:

• The Court has signaled that it will employ the “duck test” when characterizing incentive payments as bonuses or commissions under the IWPCA. (If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.) Here, the duck is a commission, and if the incentive plan at issue, both as written and in practice, features the classic hallmarks of a commission arrangement, than it is in all likelihood a commission plan, regardless of how the employer labels payments under the plan.
• Employers should review and, if necessary, revise their incentive compensation schemes to ensure the plan and/or policy documents expressly disavow contract status and reserve the company’s right to amend or terminate plan terms at anytime.
• Likewise, employers should determine whether the incentive compensation paid under any particular plan or policy is properly characterized as bonus or commission compensation and, based on that determination, ensure that the terms and conditions of the plan comport with the requirements of the IWPCA (including the IWPCA’s limits on the timing and accrual of such payments). Finally, plan documents, as well as training presentations, employee communications and any other materials (e.g. payroll checks, disciplinary notices, and employee handbooks) should use consistent terminology to describe payments under the compensation plan.

For more information, please contact your Baker McKenzie employment lawyer.