Commission Pay Arrangements in Texas

If you as an employer pay any of your employees on commission, a recent Texas Supreme Court case makes it clear that your commission arrangement needs to be in writing.

The Court decided Perthuis v. Baylor Miraca Genetics Laboratories LLC in May 2022. In that opinion, the Court addressed the question of when a former employee has to be paid commissions collected by the company after the employee has left the job. In this case, the Texas Supreme Court determined that Brandon Perthuis, the former vice-president of sales at the company, would be entitled to a commission on the largest sale in the company’s history, even though he was terminated the day before the client signed the sales contract (but four days after Perthuis finalized the negotiations for the sale).

The Court reviewed the commission pay agreement and found that it was silent on whether the employee would get paid commissions after his employment was terminated. In the absence of a clear agreement, the Court followed the “procuring-cause doctrine,” meaning that if the employee was the reason the sale was procured, then he was entitled to the commission.

Perhaps the most important part of the Court’s opinion for any company that pays commissions is this: The procuring-cause doctrine provides nothing more than a default, which applies only when a valid agreement to pay a commission does not address questions like whether the  right  to  a  commission  extends  to  sales  closed  after  the  employment relationship ends.  

The procuring-cause doctrine is not a judicially created “term” for commission  contracts. It  does  not  add  anything  to  a  contract  or  take anything away. It does not restrict parties’ ability to modify their contractual  relationships  and  it  does  not  change  the  law  governing whether parties have entered into such a relationship in the first place. Parties certainly may condition the obligation to pay a commission on something  other  than  procuring  the  sale—they  need  only  say  so.

So the Court is saying that the company and the employee can negotiate any kind of commission pay agreement that they want. Or the company can just offer a commission arrangement and the employee can accept it. The courts will only intervene if your commission agreement is not in writing or if your written commission arrangement is silent as to an important term.

So what should a written commission pay arrangement include if any employee is paid fully or partly on commission?

  • How the commission is earned;
  • When the commission is earned (upon the contract being signed, once the transaction closes, or when the money is collected);
  • What percentage of the sale is paid out in commission;
  • Is the commission percentage based on the gross sale revenue or just the profit, and what expenses will be netted out if based on profit;
  • When will commissions be paid (weekly, monthly) and how long after the collection (“on the 15th of the month after the month in which the payment is collected”, for example)
  • What happens if the customer returns the item, cancels the service or otherwise breaches the contract – can a commission be cancelled or clawed back from the employee if already paid out;
  • Will a commission still be paid to the salesperson after termination of employment or does the employee have to be employed at the time that the commission comes due to receive the money;
  • Is there a limit to how long after termination of employment that the commissions still have to be paid out to the former employee, particularly if the commissions diminish over time; and
  • Can the commission schedule change at any time and how can it be changed?

The Texas Supreme Court has made it clear that a company can structure the commission arrangement any way that it wants, as long as employees will work under that arrangement (and, of course, assuming that the arrangement does not violate the minimum wage and overtime laws).

The Texas courts aren’t going to interfere as long as the company puts the arrangement in writing and covers all the important points outlined above. Don’t miss the opportunity to protect the company from future litigation when a simple written agreement could clear up any ambiguity in your commission arrangement.