This article first appeared in the May 2018 issue of the Massachusetts Employment Law Letter.
Employers facing litigation over wage and hour violations frequently must deal with claims besides those under the Massachusetts Wage Act or the Fair Labor Standards Act (FLSA), which are the state and federal statutes governing wage claims in the Commonwealth. Employees seeking unpaid wages sometimes add other claims to their lawsuits, hoping they may be successful under another theory if their statutory claims aren’t successful. Read on for a discussion of some of those potential causes of action and how to avoid them if you’re faced with a similar set of circumstances.
Steven Serabian was a customer relationship manager (CRM) sales specialist for SAP America, Inc., which sells software and services that help companies manage accounting, distribution, HR, and manufacturing operations. Serabian was hired in February 2011, and his compensation was set to include both a fixed salary and a “variable compensation component,” i.e., commissions that were based on a percentage of his software sales.
When Serabian was hired, his 2011 compensation package included a provision that stated his pay was subject to North America Operating Income Capped Funding, aka the funding factor. The funding factor authorized SAP America to cap the total commissions payable to a salesperson if the amount of the commissions exceeded the amount budgeted for commissions in a particular year. The result was that commissions were adjusted on a percentage basis.
In 2011, the funding factor resulted in a $93,512 adjustment to Serabian’s income—a substantial hit. Because it had already paid him much of that amount, SAP America informed him that his future commissions would be subject to a setoff of more than $45,000. Understandably upset, Serabian asked for detailed information about the company’s calculations. He repeated his request many times in 2012 and 2013.
In March 2013, Serabian joined a new indirect sales team called the “SWAT” team. SAP America claimed the team was created to “monitor” deals and work with individual direct sales representatives “to assist them in closing deals.” As part of his work on the SWAT team, Serabian contributed to a large transaction with Ernst & Young in September 2013.
Serabian thought he was entitled to a special performance incentive for participating in the Ernst & Young deal, but SAP America claimed such incentives had to be documented in writing and applied only to direct sales members. However, Serabian was present at a meeting when the company announced the sales incentives. In addition, he received an e-mail from senior management that stated he would receive the sales incentive bonus. As a result, he thought he was entitled to the performance incentive and said so.
Planning for a RIF
In September 2014, SAP America determined that a reduction in force (RIF) was necessary because of a planned merger. It decided to eliminate five CRM account executive positions and close three open positions, for a total of eight layoffs. According to SAP America, it made the RIF decisions based on the 2014 performance of the CRMs whose positions were being considered for elimination. Despite that stated criterion, two employees with low performance numbers weren’t selected for elimination. In addition, SAP America apparently understated Serabian’s productivity for 2014 and didn’t consider his previous years of productivity, although it considered other CRMs’ previous years of productivity.
Between February and October 2014, Serabian reached out to SAP America more than 20 times, seeking information about his commission payments. The company determined that it owed him nearly a million dollars in commissions for 2013, but for some reason, it paid him only a little more than $57,000, and he didn’t receive that payment until October 2014.
On October 22, 2014, Serabian was told that his position was being eliminated effective November 21. At the time of his termination, SAP America had paid him half of the $235,638 it owed him because of his participation in the Ernst & Young deal.
Breach of good faith and fair dealing
In 2016, Serabian filed a lawsuit against SAP America claiming violations of the Massachusetts Wage Act, breach of contract, breach of the implied covenant of good faith and fair dealing, retaliatory termination in violation of the Wage Act, and unjust enrichment. In an effort to narrow the case against it at trial, SAP America asked the court to dismiss the claims for breach of the implied covenant of good faith and fair dealing and retaliatory termination.
Although Massachusetts is an “at-will-employment” state, meaning that either the employer or the employee may generally terminate the employment relationship for any reason, Massachusetts law still recognizes even at-will-employment relationships as “contracts.” In every Massachusetts contract, there is an implied covenant of good faith and fair dealing. In the employment context, that covenant can be breached if the employer terminates the employee to avoid paying future expected compensation (the “financial benefit” prong). To establish a violation of the covenant under the financial benefit prong, an employee must show his employer deprived him of money he had fairly earned and had a legitimate expectation of receiving.
Serabian claimed that SAP America terminated him to avoid paying his commissions and that although an e-mail from a member of senior management directed others to provide him commission information and payment by specific dates, it was never done. Significantly, the document that justified the elimination of his position was created only five days after this critical e-mail.
SAP America argued that the decision to terminate Serabian was based on legitimate business needs, and there was no evidence that anyone at the company considered the unpaid commissions when deciding to eliminate his position. However, a lack of good faith can be inferred from the circumstances surrounding a termination, when looked at as a whole. Moreover, SAP America couldn’t show that it had indeed paid Serabian all the commissions he was owed at the time of his termination, another example of bad faith. As a result, the trial court allowed his claim for breach of the covenant of good faith and fair dealing to proceed to trial.
Termination in retaliation for complaints
Serabian also claimed that he was terminated in retaliation for his questions and complaints about his commission payments. The Wage Act prohibits an employer from penalizing an employee as a result of his efforts to vindicate his rights under the Act. Like a breach of good faith and fair dealing, retaliation can be demonstrated by the timing between the employee’s complaints and the employer’s decision to eliminate his position.
SAP America again tried to defend itself by relying on the document justifying the elimination of Serabian’s position, but Serabian was able to convince the court that the timing of that document—only five days after the e-mail from senior management about his unpaid commissions—supported a conclusion that his complaints motivated the decision. In addition, he was able to show, using the company’s own documents, that it had taken 2013 performance into consideration when deciding whether to lay off some of the other CRMs. The court concluded that there was enough evidence about whether SAP America retaliated against Serabian when it eliminated his position to allow that claim to go to trial as well.
SAP America also tried to claim that Serabian’s complaints were “abstract grumblings” about his pay and were therefore insufficient to be considered “protected conduct” under the Wage Act. The court made short shrift of that argument, noting the Wage Act protects employees who take “any action” to seek enforcement of their rights, and any reasonably objective person would understand that Serabian’s multiple e-mails about his commissions went way beyond “abstract grumblings.” Consequently, his claim for retaliatory termination will also be tried before a jury. Serabian v. SAP America, Inc. (D. Mass., 2018).
Although this is a trial court decision that could be overturned if SAP America decides to appeal, it nonetheless points out significant factors employers should consider when dealing with compensation issues. First of all, any termination that could be connected to a desire to avoid paying an employee commissions he is owed is going to seem suspicious. If you’re considering a RIF in a situation where unpaid commissions are a factor, you should consult labor and employment counsel to be sure the circumstances of the decision don’t suggest the commission payments figured into the decision.
And whenever you’re considering a RIF, you must be absolutely certain that you’re weighing the same factors for all the possible candidates. As this case shows, taking certain things into consideration for some candidates and ignoring them for others will only imply that employees were targeted for some impermissible reason.
Susan G. Fentin is of counsel at the firm of Skoler, Abbott & Presser, P.C. Susan can be reached at 413-737-4753 or email@example.com.